Car Loans for Used vs. New Cars: Pros, Cons, and What to Consider?

For lots of New Zealanders, buying a car can mean taking out a loan.

If you don’t have the cash upfront or you want to spread the cost, financing the purchase can make a lot of sense.

But does it make a difference whether you’re buying new or used, and how might a loan be different in each scenario?

Here, we’ll look at the pros and cons of each option and what might help you decide on the right one for you.

What is a car loan?

A car loan is a loan that you take out to buy a car. You borrow a sum of money from a lender and then pay it back, plus interest and fees, over a set period of time.

Usually, a car loan is secured against the vehicle. This gives the lender greater peace of mind that if you’re not able to repay the loan, they can take your vehicle and sell it to recover what you owe. This can sometimes mean your interest rate is lower than the rate you might pay on an unsecured loan.

How can a car's age (new vs. used) affect your loan options?

When you’re in the market for a new car, you might be weighing up the pros and cons of buying a new or used car.

Buying new?

There can be benefits, such as:

Lower interest rates

Sometimes lenders will have special offers for new vehicles, which give you access to reduced interest rates or different repayment options.

Up-to-date features

Your new car will probably have the latest technology and safety features, and come with a warranty.

Lower maintenance costs

Your new car should cost you less to run and maintain, at least initially.

But on the other hand, your purchase price is likely to be higher, and you may need a bigger loan to purchase your vehicle.

It is likely to depreciate faster than an older car. You may also pay higher insurance premiums.

Buying used?

It may be cheaper

You may be able to buy a used vehicle more cheaply, and require a smaller loan.

It may hold its value

You don’t have to worry as much about the value dropping “when you drive it off the lot”, as you might if you’re buying a new car. The depreciation rate of used cars is slower than new vehicles.

Insurance may be cheaper

Because your car is not as valuable, you may not have to pay as much to insure it.

But there may be a higher interest rate associated with the loan because lenders may find it harder to assess its resale value. You might have a shorter loan term or stricter lending criteria than might be offered with new cars, you may need to set aside more money for maintenance, and you usually won’t get a warranty.

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Key factors to consider before deciding

There are a few things to think about before you make up your mind.

Budget

How much can you afford to spend on monthly repayments? What size loan are you comfortable taking out, and what will lenders be comfortable that you can service?

Loan Terms

What sort of loan is on offer, and what interest rate and loan terms are you likely to be given

Depreciation

Are you worried about the prospect of the vehicle dropping in value and being worth significantly less than you paid for it?

Insurance and Maintenance

Can you afford to pay for upkeep and maintenance if something goes wrong, or do you prefer the peace of mind that might come with a new car’s warranty?

Resale Value

Do you expect to sell the car in the medium term? Are you concerned about being able to recover most of your initial outlay? Do you know what sort of market there might be for the resale of your vehicle?

Lifestyle Needs

Does your family have particular needs that a new car’s features cater for? Or is there a specific model of vehicle that you particularly want to invest in? Your lifestyle and what you need the vehicle for will have an impact on which car might be the right option for you.

Practical tips for getting the best car loan

If you’re thinking about applying for a car loan, there are a few things you can do to make the process smoother.

Check and improve your credit score before applying

Lenders may be more likely to offer you a loan if your credit score is good, because this indicates that you’re likely to repay the loan without problems. You can request a copy of your credit report from credit bureaux such as Centrix and Illion. If there’s something on there that is incorrect, you can have it updated. Making payments on time, even if it’s just for your phone bill, will improve your score. For more detailed tips, read our comprehensive guide on how to improve your credit score.

Consider pre-approval for better bargaining power

If you are preapproved, you will know how much you can afford to spend and can negotiate a sale knowing that you have the money available to complete the purchase.

Read the fine print

We’ll help you to understand the terms of any loan you take out. It’s important to know about any fees you’ll pay and what happens if you need to make changes to your loan.

Don’t borrow more than you need

Lenders have an obligation not to lend you more than you can afford, but you need to be comfortable with your loan repayments, too.

Frequently Asked Questions (FAQs)

• Is it easier to get a loan for a new or used car?

  There can sometimes be special offers for finance on a new vehicle, but provided you meet lenders’ criteria, it should be possible to get finance for either a new or used vehicle.

• How much deposit do I need?

  This will depend on the lender and your individual circumstances. The larger your deposit, the smaller your loan will be and the lower the repayments.

• Can I pay off my car loan early?

  There may be fees associated with paying off your loan early, but we can help you work out what these could be.

• What documents do I need to apply?

You’ll need proof of address, identification and proof of income. The better finance™ team can help you get this together to make the application process easy.

If you’re ready to get on the road, get in touch with the team at better finance™. We’re personal lending experts and here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.