It seems logical that buying a used car would be generally more affordable than buying a new one, but that cost gap has grown recently, making used cars increasingly appealing to budget-minded consumers. The difference between the average monthly payment for a new car and that for a used car was $122 in the second quarter of this year, the largest that gap has been since Experian started publicly sharing those figures in 2008.
Consumers making loan payments on new cars paid an average of $483, compared to the $361 coming out of the pockets of used-car drivers. That difference adds up to a lot over the life of a loan, even when you consider the fact that used-car loans generally carry higher interest rates than new-car loans: The average interest rate for used-vehicle loans was 9.1% in the second quarter (up from 8.8% in Q2 2014), and the average interest rate for new-vehicle loans was 4.8% (up from 4.6%), according to the report.
Of course, used-car buyers generally finance a smaller sum than those buying new cars, which contributes to the payment difference, but new-car buyers are more likely to stretch their loan payments out over a longer period of time, which actually brings the average monthly payment figure down. In the second quarter, loan terms of 73 to 84 months (about six to seven years) made up 28.8% of all new car loans (a 19.7% increase from the same time last year), whereas terms of that length made up 16.1% of used loans (a 14.8% year-over-year increase). A lower interest rate won’t help you save much if you’re dragging repayment out for many years, racking up interest along the way.
“Used vehicles will save consumers in both overall financing as well as typically a lower monthly payment,” said Melinda Zabritski, Experian Automotive’s senior director of automotive finance, in an email to Credit.com. “The gap is primarily driven by vehicle price. Average MSRP (manufacturer’s suggested retail price) on a new vehicle is over $30K while average value of used vehicles is significantly lower.”
Car buyers need to consider a variety of factors when purchasing a vehicle, but affordability is huge: If you can’t make your car payments, not only will you damage your credit (which can make it more difficult for you to get a loan for another car, among other financial ramifications), you also risk having your car repossessed. Losing your main mode of transportation could cause you many other problems, so it’s important to prioritize affordability when car shopping.
Another key to saving money on a car loan is to improve your credit score as much as possible before applying for a loan. People with good credit tend to get lower interest rates, while bad credit can end up costing you a lot of money through the years you’re paying off the loan. It’s a good idea to go into the process knowing where your credit stands. Checking your score regularly allows you to go into the carbuying process more prepared and gives you time to improve your score before buying a car, if necessary.