How Auto Finance Works For New vs. Used Car?

If you are in the market for a car but are facing financial barriers, auto financing can help to spread the cost of your new or used car for a period instead of outright payment. However, is there any difference between car finance for new and used cars?

Knowing how auto finance works for new vs. used cars is essential for managing your budget effectively. Now let’s delve into this topic to secure the best deal on your next car payment. 

Car Finance Explained

Car finance, known as auto financing is a popular way to purchase a new and used car which means you don’t have to pay the full price upfront and instead it can spread the cost over a manageable period. Simply put, you’ll typically pay an initial deposit towards the car, and auto finance will loan you the remaining amount with added interest charges which you’ll then pay back in monthly installments over an agreed period, typically between three to seven years.  

And, the deposit amounts and monthly repayment are determined by some factors: 

• Cost of the car
• Interest rate charged
• Length of agreement 

There are various finance agreements available to you when buying a car but some of the most popular ones are: 

• Hire Purchase (HP): Hire Purchase (HP): The HP is a quite straightforward finance option that allows you to spread the cost of buying a car. it’s ideal for buyers who want to own the car outright at the end of their finance contract. The key features of the hire-purchase are fixed monthly payments and fixed interest rates you own the car at the end of the agreement, which makes it easier for you to manage your outgoings. 
• Personal Contact Purchase (PCP): The PCP is a popular form of car finance because it’s a flexible way of getting the car you want to drive more affordably. With a PCP agreement, your monthly repayments are lower in comparison to other types of auto finance. If you like changing your car more often or you want newer or higher car specs, the personal contact purchase could be the right option for you. 
• Person loan: With this solution, you never actually own the car, you rent it for the long term until the end of the agreement and then simply return it to the dealer, swapping it for a new one. The personal loan is great if you don’t want to worry about unforeseen costs, no depreciation, and no hassle. 

You can find out more about car finance from Auto Finance Direct to have more options. 

How Auto Finance Works For New vs. Used Car?

While auto finance for both new and used cars provides the benefits of spreading payment over time, there are still key differences in terms and considerations for each:

1. New vs used car interest rates

Typically, the rate of interest for used car financing is slightly higher in comparison to new cars. This is because a pre-owned car purchase is riskier than a new car owner. Lenders often have an easier time valuing new cars than used cars. 

According to Forbes, the interest rate for new car financing in India starts from 7% per annum while this figure for used cars starts from 10% per annum. The interest rates are subject to change as per prevailing conditions. Even, for certain makes and models, you can also have the option of 0% APR new car financing. 

However, since used cars generally cost less, you just need to pay smaller payments every month compared to new cars. 

2. Loan term

Generally, car finance has a maximum tenure of seven years. However, determining the tenure for a used car loan is slightly tricky because the value of the car will decrease with the extra years of usage. So loan tenure tends to be longer for new cars (5-7 years) compared to used cars (3-5 years). Due to the limited residual life of a used car, the car owner should go in for a used car loan with a low term or pay off the loan before the actual tenure. 

3. Loan approval

The approval for a new and pre-owned car loan generally follows a similar pattern, however, the process for a used car loan generally takes longer than the loan for a new car. The reason is that the lender will need to take a detailed check of the used car to assess its condition and value. If the car is bought from an unorganized player, it will cost more time for disbursal. Please note that in both cases, the dealership or lender will conduct a credit check to assess your creditworthiness. A higher credit score generally leads to better interest rates.

4. Condition of the vehicle

For new car finance, the buyer is assured of the “newness” of the vehicle because the car is shipped directly from the factory to the dealer showroom and is therefore in a crisp, unused condition with all the features working perfectly fine. Additionally, when buying a new car, you will have many options with the latest models with modern technology and safety features and you may be spending less on repairs in the long run. 

Although they do not have the most recent technology like new cars, there is still a broad range of years and models to pick from when buying a used car, and even some certain years and models can be better than new ones related to performance and reliability. To ensure safety, let’s get a used vehicle inspected before you finance it may help you get a clearer picture of the full investment you’re committing to and help you build a more accurate auto budget.

5. Loan-to-value ratio (LRV)

The LTV is the amount of your loan divided by the vehicle’s actual cash value. Lenders apply this formula to decide whether to lend you money for a car. Due to the inherent risk involved, the loan-to-value ratio for a used car loan is lower than that for a new car loan. While the LTV for a pre-owned car loan is from 80% to 90% of the car’s value, this number for a new car could go as high as 100%. 

Final Thoughts

Buying a vehicle is an important investment, and auto financing options contribute a great effect in making that purchase feasible. Knowing the differences between financing a new car and a used car can help to make the right choice in deciding the type of car (new or used) and getting the best deal.