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How Loans Differ for New Cars Versus Used Cars

The business of lending money for the purchase of an auto is big business in this country. According to statistics, the average cost of a new car has jumped from $25,703 in 2002 to $30,592 in 2013. That’s more than most people can afford to pay, without the help of car loans with decent interest rates. Even good pre-owned cars can be costly as they often come with higher used car loan rates as well.

New Car Loan Rates

Loan rates for new cars vary and are dependent on several factors including the loan term and amount of money financed.

The length of time the borrower requires to finance a vehicle affects the interest rate on a car loan tremendously. The longer a consumer finances the car, the higher the interest rate will be. According to some auto lenders, there is a growing trend toward longer loan terms for new cars, some even as long as 84 months. Interest rates for longer loan terms can be much higher however.

Consumers, who finance an auto that costs over $20,000 for seven years, end up paying interest rates more than twice as high as those with more traditional 48-month, four-year loans. Why do they do it, despite the cost of borrowing for longer periods of time?-Payment amount. Twenty percent of new car loans are made with 84-month, long-term affordable monthly payment amounts in mind. Many consumers who want to buy new cars simply don’t have the monthly income to cover a payment on a two or four-year loan agreement.

Because of this, more and more people are opting for maximum loan terms. While the interest rate for such long-term loans may be higher, consumers are willing to pay a lot more in the long run to get the car they want at a payment they can afford. Others choose to refinance car loan agreements before the term expires.

Used Car Loan Rates

Financing a used car is somewhat different than borrowing money for a new car. Interest rates for used cars are generally higher than those for new cars and loan terms are shorter. This is because the bank or finance company takes a higher financial risk making a loan for a used car. Because the car is pre-owned, there is already wear and tear on the vehicle.

Lenders know that used car buyers may be more likely to default on car loans because of the tendency for cars to have mechanical problems throughout the course of the loan term. For some, it’s hard to continue making payments on a car that’s already having problems.

Bad Credit Car Loans

Car loans for bad credit, or consumers with less than desirable credit are available to car buyers everywhere. These are generally for people with scores below 600. Unfortunately some auto dealerships prey on buyers with poor credit by lying to customers about available car loans and financing options and insisting on financing for extended protection plans and insurances.

While interest rates for consumers with bad credit are definitely higher than those for people with excellent credit, car buyers should still shop around and compare car loan products.

Car Loan Payment Calculator and Car Loan Interest Rates

Armed with both a payment calculator found online and a variety of interest rates to choose from, consumers can compare car loan products and get the best rates and payment terms based on their individual credit scores. Just because credit scores are lower, consumers don’t have to accept unfair terms or outrageous fees and charges.

In the consumer auto loan marketplace there is financing available for every credit and financial situation. While interest rates, loan terms and conditions will differ, financial agreements for auto purchases are still competitive. With a basic understanding of how new and used car financing works and the factors that affect payment amounts and interest rates, you can compare loans to get the best deal available.

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Jeff Dunphy

Jeff Dunphy has years of experience in the field of borrowing. He is the founder of a website that teaches consumers about credit cards, credit scores, loans, and credit repair.
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The content on is for informational and educational purposes only. It is not financial advice and we are not certified financial advisors. strives to keep its information accurate and up to date, but it may differ from actual numbers. We may have financial relationships with companies listed on our site. We may receive compensation for the placement of sponsored products or services. We work hard to write authentic and accurate articles.