Financing New and Used Cars: What’s the Difference?

February 25th, 2019 by

Financing used cars
Buying a car is a big investment. When people prepare themselves to buy a car, whether a new or an old one, they need to take into account a lot of factors. There is also the inevitable comparison between the latest entertainment, safety and design features available in a new car, and the slower depreciation and lower price of the used car.

But one of the most important considerations is the mode of payment. When buying a car, you have two options: paying with cash or through auto financing. Paying in cash is simple enough but many people don’t know what to expect when buying a car through auto financing.

How Auto Financing Works

Car financing is primarily based on the factors stated below:

Credit Score: When a person applies for a car loan, the lenders will estimate the risk the individual carries as a borrower by taking a look at his credit score. The higher your credit score, the lower your monthly payment and interest rates will be. If a person has a spectacularly high credit score, for example above 750, that person will be charged a nominal interest rate; in fact, in some cases, it could end up close to zero.

Payment Duration: A prospective buyer will also need to determine how long they want to make the payment, but a good practice is not to go above 5 years. You will get a lower monthly payment bill the more you stretch out the time to pay back the loan; however, in the long term, it can also mean higher interest rates.

Down Payment: Your monthly payment can go up or down, depending on how much down payment you have given. For example, if you want to buy a $20,000 car with no down payment, financed for 4 years at 4% interest, you will have to pay $452 each month. However, if you put out a down payment of just $8,000, your payment will drastically reduce to $271 per month.

Therefore, it is essential that a person calculates how much they can afford to pay each month, so that it doesn’t bust their budget. Most experts recommend a person’s monthly payment should not be more than 5-10% of their net income.

A big factor in offering auto loans also depends on how new the car is and this should also be factored in just like the price, design and safety features of your car. Let us take a look at some comparison between buying a used car and a new car.

Interest Rates Differences

New Car: Usually, buying a brand-new car means you get very attractive auto loan offers; that is because new models qualify for manufacturer-backed interest rates. These loans can be as low as zero to 1%. Third-party financing companies also offer very low interest rates for new vehicles as they represent low risk.

Used Car: On the other hand, if you are considering used cars for sale, lenders may charge you a higher interest rate. However, there is no need to worry. Some auto dealerships and third-party lenders can help you get a low loan on a car that has been in use for just a couple of years. However, cars that are several years old have higher risks associated to them, which is why lenders will charge you a higher interest rate on them.

Auto Financing Terms For New and Used Cars

New Car: Besides the interest rate, new and used cars also can have significantly different repayment terms. Third-party lenders are often happy to offer longer terms for cars that are brand new, even up to 7 years and in some cases, even more. This means a lower monthly payment. These longer terms are offered because new cars are far more expensive than used vehicles and also because the financing companies takes on less risks with a new car.

Used Car: Used car financing is usually offered with shorter repayment terms and the longest a used car buyer can stretch the term out is 72 months. Despite the fact that a used car buyer may have a steady income and a wonderful credit score —the situation when the buyer can be given a 72-month repayment term for a used car — lenders are reluctant to take on the higher, long-term risk. Hence, used car buyers only get a repayment term of 3- 5 years. However, the good thing about a short repayment term is that the interest rate remains low and you will be the outright owner of your car in just a few years.

Decisions: Should I Buy A Used Car?

Buying a new or used car is always a personal decision. The prospective buyer must be comfortable in whatever decision he makes; he should also take into consideration various factors such as safety and design features, appearance and financing aspects of the vehicle. All these elements have an impact not just on the total payment you need to dish out for the car but also on your bank balance. It is best that a person contact the representative of the dealership he has chosen and make an informed buying decision.

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