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Is A New Car Loan Or Used Car Loan Your Best Option?
By EchoBay Loans Staff Writer

Since there are advantages and disadvantages for each choice, you must carefully weigh your options to decide which type of vehicle is best for you. For many car shoppers the decision comes down to the financing options and the selling price of the car. Here's the information you'll need to make your decision of whether a new or used car loan will have you behind the wheel of the car you want to drive and more importantly, can afford.

Interest Rate
The 0% new car loan interest rates that many dealers occasionally offer can be hard to turn down. Of course, there can be a catch.
This new car loan is generally only for a maximum of 36 months and is only available to those with excellent credit. If you can afford the payments and fall into the excellent credit history category, this type of a new car loan is usually the best option for you vs. a used car loan.

Even if these super low rates are not available to you, you should know that the interest rate for a new car loan is generally less than the interest rate for a used car loan. There typically is not a great deal of difference, maybe one to two percent. If you are buying a much older car, you can expect to see a higher rate versus a used car that is just a few years old. Interest rates can be the deciding factor when choosing between a used or new car loan and your decision will be effected by whether you qualify for a special interest rate offered by a dealer or can only qualify through a lender that offers you new and used rates that have a large spread between them.

Loan Terms
On a new car loan, you have the option with many dealers to finance for as long as 72 months. This gives you the flexibility to work out a payment schedule that may be longer or shorter depending on what you want your monthly payment to be. On a used car loan, the terms are generally stricter and generally you are not able to finance for more than five years. This is where the decision to get a used or new car loan is made for many people since most people buy a car based upon what monthly payment they can afford.

If a lender offers a longer loan term such as 60 or 72 months and this brings the payment down to what you can afford, you might make the decision that this loan is your best option. On the other hand, if you are looking at a used car and your lender only offers 36 or 48 month loans, you could have the same payment as a 60 or 72 month new car loan but be driving an old car.

The downside of being able to drive a new car for less than a used car is that you'll pay a large amount of interest over a longer loan term and run the risk of being upside down in your loan. Being upside down is when the value of the car is less than what the amount owed on your loan is. This occurs in longer term loans since a car's value depreciates up to 20% when it is driven off the dealers lot. In order to avoid an upside car loan, you should finance the vehicle for the shortest amount of time possible, which may mean a used car is your best decision.

Price & Depreciation
The price of the car, which determines a car buyer's monthly loan payment, is typically the deciding factor for most people when they are trying to decide between a new vehicle and a used vehicle. Of course, the price of your new car is going to be higher than that of a used car. But with the new car, you can order the vehicle exactly to your specifications as long as you are willing to pay for the extras. With a used vehicle, you may have to settle for what you can find.

As mentioned above, in a new car's first year it can lose 20% of its value or more. Used cars give you the best value (when looking at price alone) because it has already undergone the massive depreciation of the first year.

Maintenance
Maintenance on a new car should be minimal other than oil changes and tire rotations. Most cars, especially foreign luxury models, require routine maintenance as you reach certain mileage intervals. This maintenance can be quite expensive. You should be able to inquire at the dealer about the costs of these tune-ups before you buy your car.

With a used car, the maintenance that is involved depends largely on the type of car, its condition and its mileage. If you buy a low mileage car that is in good condition, you can expect to have the same maintenance issues as you would have on a new car. However, if the car is older or has high mileage, your maintenance costs could be much higher. In addition to making the decision of whether a new car loan or used car loan fits your budget, the additional maintenance costs of new vs. used cars should definitely be a consideration for you when buying a car.

Insurance
Whether you have a new or used car loan, your lender is going to require insurance coverage for your vehicle. The amount you pay for insurance depends on where you live, the type of vehicle and your driving record. Insurance on a new car is going to run more than on a used car simply because the value of the new car is higher. You should check out insurance rates before you purchase the car so this estimated cost can be added to what your expected used or new car loan payment will be.

Warranties
New cars carry a warranty that protects you in the first few years of owning your car or for a pre-set amount of miles. Generally, the warranty is for three years or 36,000 miles. When making the decision of whether to get a new car loan, no additional cost needs to be added to your estimated monthly loan payment unless you will be purchasing an extended warranty to cover you for a longer period or more miles.

On the other hand, when buying a used car you may want to purchase a warranty if the dealers warranty has expired due to time, exceeding the allowed number of miles, or is not transferable from the previous owner. Extended warranties are not inexpensive and their additional cost can influence your new car loan vs. used car loan decision. Purchasing new car with an included warranty can save $400-$1,500+ over the cost of buying a used car and purchasing an extended warranty from a warranty provider.

When you are shopping for a vehicle, be sure to look at all of these issues to help you decide which type of loan best suits your needs. As you can see, there are advantages and disadvantages to both.


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