Car Finance

Used Car Finance Versus New Car Financing

By Mike Richards Updated: 07/27/2022 Posted: 06/27/2018

Have you recently graduated and have just landed your first ‘real’ job? Or perhaps you have concluded that public transportation is no longer your forte? Or maybe you just need another car, for whatever reason? Whatever your budget may be, there’s a high chance that you already qualify for some form of car financing. The caveat, however, is that you may only qualify for a used car, especially if your credit score is shy of 620 points. But if you are lucky to have a good, or even great, credit score, you can still get the best deal for used car finance or new car financing. 

First of all, let’s debunk the myth that there are new cars on the road. You see, once the car leaves the showroom and onto the street, it has already lost a couple of thousand dollars in terms of value. Every car you see on the road is used.

The difference is in how long and how well-used it has been.

For this article, however, the term ‘new’ refers to a car that has not left the showroom. Once the sale agreement is drafted and signed, and the new buyer drives out of the showroom, that car ceases to be new.

But that’s beside the point. To get you into a car, whether ‘new’, ‘showroom-new’, or used, consider the following tips on how you can go about buying a new or a used car without being submerged in debt.

Granted, nothing beats driving out of a showroom in a brand new car. The feeling of being the first owner is exhilarating. New cars, however, do not come cheap, but this does not mean you can’t get into one cheaply if you consider a few financing tips and tricks that could make owning a new or a used car less intimidating. Rather than approach an auto lender without a clue, you are better off knowing what to expect to proceed with confidence.


Shop Around for the Best Interest Rates

Most lenders have their interest rates out in the public domain. This makes sense because a lower interest rate is a lender’s most effective marketing tool. You are therefore likely to come across this information on various public portals such as websites. If there is one thing you should take seriously before you approach a lender, it’s their interest rate. A lender may have everything else going for them, but a high-interest rate is likely to cancel out any other benefit they may offer. The percentage of the interest rate charged is especially key when buying a new car. This is because new cars are more expensive. And don’t be tricked by those low monthly payments, which are low because they are spread out to eternity. You don’t want to be paying for a car seven or even eight years from now.


Go for Shorter Repayment Periods

If you are going through a tough time, low monthly payments may look like a good deal. Right? Wrong! Whenever you hear a car dealer ask you how much you can afford to pay per month, don’t answer them. They are most likely trying to sell you the most expensive loan you’ve ever taken. Instead, tell them how much your budget is for a new or a used car. Stick to your budget and let them calculate your monthly repayments from your budget backward. Don’t accept low regular payments that work out to a humongous amount once the loan is paid in full seven or six years down the line. The trick is to go for the shortest repayment period possible. Stretch a little bit and commit to paying the loan within a certain duration rather than letting it snowball into a monster of a loan.


Take a Personal Loan

In some cases, it may be easier and cheaper to get a personal loan, especially if you have good credit. Once you get a personal loan, you can go to the dealer and just buy the car you want, new or used; it’s your call. I guarantee you the salesman won’t be smiling as his arrangement with financiers would be in jeopardy. Don’t be surprised if your attempts to get a discounted price do not work as you had hoped. The beauty of taking a personal loan to buy a car is that you can decide to sell the car later to pay off the loan should things get tight. However, if you decide to take up a personal loan, make sure that your payments are never late as this will hurt your credit score.


Get Pre-Approved for a Loan First

Being approved for auto financing before you head to the car dealer puts you in the driver’s seat (literally) when it comes to negotiating for the best price. With dealer-arranged financing, you don’t have much wiggle room. If you decide to go with dealer-arranged financing, don’t they take the car out of the dealership until the deal is complete? Financing can take between a day and two days. During this time, the transaction is technically incomplete, and the financier may change the terms of your auto financing later, citing flimsy excuses that have no bearing on you.


Avoid Snowball Auto Financing

Unless you are a student just starting on your first job, avoid any financing that snowballs into huge payments as the loan matures. Snowball loans start with low payments but progressively increase towards the end. They could be ideal for students on their first job who hope to secure better-paying jobs in the future and hence be able to pay larger amounts. These loans may help you get you onto the road quickly, but you will pay dearly (pun intended) towards the end.


Make Lump Sum Payments

Whether you are buying a new or a used car, once you secure financing, you could go for lower monthly payments, but progressively make deposits towards your principal loan balance. The lower amounts mean you will not face the risk of late payments or defaults. However, by reducing your principal balance progressively, you will pay back the loan faster, and also end up paying less cumulative interest. Before you go for this option, however, make sure that your lender does not penalize prepayment.


Keep Away from Those Fancy Extras

This may not be relevant if you are buying a used car. But if you are buying a new car on a tight budget, stay away from those extras that the salesman is all gushy about. They will make the final cost of the car look completely different. What you want right now is a functional car, not a beast on the road.

If you are on a tight budget, consider getting financing for a used car (well, even your friends are driving one). You may not be the first to call it your own, but that’s neither here nor there. The most important thing is to get a car you can afford.

Used cars cost much less than new ones. But you might pay a higher interest rate for a used car than you would for a new one since a used car is greatly depreciated than a new one. In any case, you can drive the cost of a used car to bare-bottom prices. Make sure you let the dealer understand that you are doing them a favor by getting the car out of their yard.

In any case, the longer it stays there, the more it depreciates.

If you can get financing for a new car, by all means, go for it. The truth is that everybody wants to drive a new car, with a few exceptions. For instance, if you can lay your hands on a broken-down, dilapidated jalopy that Elvis Presley used to drive, you might just want to ignore that new car. But that is a very unlikely exception.

In real life, new cars often trump used ones. But the one thing to remember is that every new car that rolls out of the showroom doesn’t stay new. On the other hand, every used car was once new. Whether used or new, the state of ‘newness’ depends on how a car is used, and for how long. If a used car is in mint condition, it will serve you just right. On the other hand, if financing can allow you to get into a new car, then that’s even better.