Financing New vs Used: What Changes

The car you choose affects your loan options, rates, and total cost. Here's what's different.

The Big Picture: New vs Used Financing

Financing a new car and financing a used car are different experiences:

Interest Rate Differences

New Car Rates

New car rates are typically 1-3% lower than used car rates:

Why:

• Lower risk for lenders (new cars have warranties, known condition)
• Manufacturer subsidies (0% financing promotions)
• Higher resale value as collateral

Typical rates (2025):

Used Car Rates

Used car rates run higher:

Why:

• Higher risk (unknown maintenance history)
• Faster depreciation relative to loan balance
• More variation in condition

Typical rates (2025):

Certified Pre-Owned (CPO)

CPO vehicles often qualify for rates between new and regular used:

• Manufacturer inspection and warranty
• Lower perceived risk
• May access manufacturer financing rates

Loan Term Differences

New Cars: Longer Terms Available

Lenders offer 72, 78, and even 84-month terms for new cars.

Why: New cars maintain value longer, reducing lender risk.

The trap: Long terms keep you underwater longer and cost more interest.

Used Cars: Shorter Terms Required

Many lenders cap used car loans at 60-72 months. Some limit older vehicles further:

Why: Older cars depreciate faster and have higher failure risk.

Down Payment Considerations

New Cars

Recommended: 20% down

Why it matters:

• New cars lose 20-30% value in year one
• Without 20% down, you're immediately underwater
• Larger down payment offsets rapid depreciation

0% down promotions: Some manufacturers offer zero-down financing. Proceed with caution; you'll be underwater immediately.

Used Cars

Recommended: 10-20% down

Why less is okay:

• Depreciation is slower (biggest drop already happened)
• Lower purchase price means smaller loan
• Less negative equity risk

But consider more if:

• The car is 5+ years old
• You have subprime credit
• The car has high mileage

Promotional Financing: The New Car Advantage

0% APR Offers

Manufacturers subsidize 0% financing on new cars to move inventory.

How it works:

• Toyota Financial, Ford Credit, etc. offer 0%
• Usually requires excellent credit (720+)
• Often limited to specific models
• May conflict with cash rebates

The catch:

• Often can't combine with rebates
• Limited to certain loan terms
• Not all buyers qualify

Is 0% better than rebate?

Example: $35,000 car

• Option A: $4,000 rebate + 6% rate for 60 months
• Option B: 0% APR for 60 months

0% wins by $940. But always run the math for your specific situation.

Used Car Promotions

Promotional rates on used cars are rare, but watch for:

• Credit union "used car sales" with reduced rates
• Dealer specials on certified pre-owned
• Manufacturer financing on CPO vehicles

Vehicle Restrictions by Lender

Mileage Limits

Many lenders won't finance high-mileage vehicles:

Age Limits

Lenders also restrict vehicle age:

What this means: A reliable 12-year-old Honda may be hard to finance through mainstream lenders, even if it has low miles.

Minimum Loan Amounts

Many lenders have minimum loans ($5,000-$7,500). Very cheap used cars may not qualify for traditional financing.

Total Cost Comparison

Let's compare the true cost of new vs used:

Scenario: Need a reliable sedan

Option A: New Honda Accord

• Price: $32,000
• Down payment (20%): $6,400
• Loan: $25,600 at 5.5% for 60 months
• Monthly payment: $488
• Total interest: $3,680
• Year 1 depreciation: ~$6,400 (20%)

Option B: 3-Year-Old Honda Accord

• Price: $24,000
• Down payment (15%): $3,600
• Loan: $20,400 at 7% for 60 months
• Monthly payment: $404
• Total interest: $3,840
• Year 1 depreciation: ~$2,400 (10%)

5-Year Total Cost:

The 3-year-old car costs $11,840 less over 5 years, despite the higher interest rate.

When to Finance New

New car financing makes sense when:

1. Manufacturer offers 0% or very low rates The rate advantage can offset depreciation.

2. You'll keep the car 10+ years Spreading depreciation over more years reduces per-year cost.

3. You want specific features or technology Sometimes new models have safety features not available used.

4. Reliability and warranty matter most New cars have full warranty coverage.

5. You have excellent credit Access to the best new car rates.

When to Finance Used

Used car financing makes sense when:

1. You want to minimize total cost Used cars almost always cost less to own.

2. Your credit isn't excellent The rate gap between new and used narrows for lower credit scores.

3. You're okay with 2-4 year old vehicles The sweet spot for value (depreciation hit taken, plenty of life left).

4. You plan to keep it 5-7 years Still getting good value without extending too long.

5. You prefer lower monthly payments Used cars mean smaller loans.

CPO: The Middle Ground

Certified Pre-Owned programs offer benefits of both:

Advantages:

• Manufacturer-backed warranty
• Thorough inspection
• Often better financing rates than regular used
• Lower price than new
• Some manufacturer loyalty benefits

Disadvantages:

• More expensive than non-CPO used
• Still depreciates (just not as fast as new)
• Limited selection (dealer must have it)

Best for: Buyers who want reliability assurance without new car prices.

Financing Strategy by Vehicle Choice

Buying New

1. Check for manufacturer promotions first
2. Get pre-approved from credit union
3. Negotiate car price before discussing financing
4. Compare dealer rate to your pre-approval
5. Put at least 20% down
6. Choose 48-60 month term max

Buying Used (from Dealer)

1. Get pre-approved from credit union or online lender
2. Know the car's value (KBB, Edmunds)
3. Check if CPO is available
4. Negotiate price first, then financing
5. Put at least 10-15% down
6. Match term to car's expected remaining life

Buying Used (Private Sale)

1. Arrange financing before shopping (credit union or personal loan)
2. Get pre-purchase inspection
3. Verify title is clean
4. Pay off loan; seller signs title to you
5. Consider using a service like Caramel for safe transaction

The Bottom Line

New cars have financing advantages (lower rates, promotional offers) but cost more overall due to depreciation.

Used cars cost more to finance (higher rates) but cost less to own.

For most buyers, a 2-4 year old vehicle with reasonable financing offers the best value. You skip the worst depreciation while still getting a reliable, modern car.

Key takeaways:

• Run the total cost numbers, not just monthly payment
• Don't let a low rate on a new car blind you to total cost
• Match your loan term to the car's expected life
• Put enough down to avoid negative equity

Last updated: January 2025