Car Loans for New and Used Cars

There is a big difference between buying a new car and a used one! Dealers are eager to sell you an expensive new car and finance it with a low interest loan. So are the banks and the credit unions. The story can be quite different for used cars.

The interest on a new car loan bought from a dealer will be over half a percentage point less than a dealer-sold used car. And, that same loan can be two and a half percentage points higher if that used car is sold by an individual.

Why the difference?

It is estimated that a new car will cost you twice its original cost over its ten-year life span. But a used car will cost you three times as much. A used car declines in value faster than a new one while it costs more to operate, to maintain, and to finance. Also, it is much harder to guarantee the reliability of a used car when you buy it. A lemon is hard to spot when it’s polished up, even when a dealer sells it to you. For that reason, lenders see it as a riskier investment. And they charge more to cover their risk.

Getting a used car loan

Many people buy their used cars with cash because a used car loan is more expensive and harder to get. However, a used car from a dealership will often come with a guaranteed loan. The interest rate will be significantly higher than for a new car Still, this arrangement may turn out to be a good deal for a buyer since the dealer can attest to the reliability of the car and usually offers a limited warranty.

The standards for getting a used car loan are basically the same for getting a new car - the lenders will be looking at your monthly income to make certain that it is at least three times the amount of the loan. If you have additional outstanding loans, they will want expect your income to be at least four times the loan. They will also want to check your credit history and see how much you are offering as a down payment. Two factors that may also hurt your chances of getting a loan are if you are buying the used car from an individual and if you are asking for 100 percent financing.

So, whether you are getting a loan for a new car or a used one, you will still have to line up your financing, put together your down payment and get your credit rating into great shape.