Buying a Used Car to Save Money? This One Thing Could Derail Your Plan

You might be surprised at the difference in this part of a vehicle's cost.

You might think buying a used car will save you money. And you're right. The average new car price in 2023 is $48,094, according to Kelley Blue Book, while the average used car sells for $27,564. Even if you buy a higher-end used car, it might have a lower purchase price than the new car you have your eye on.

However, if you're planning to finance your next vehicle purchase, there's one other thing you need to keep in mind. Lenders typically give higher interest rates on used car loans.

Used car interest rates

Used car interest rates can be significantly higher than those charged by lenders who finance new cars. To add some context, here's the difference between new and used car interest rates as of Feb. 8, 2023, according to data on 48-month car loans from myFICO.com.

Also, keep in mind that this data is for 48-month car loans. Interest rate differences can be even wider when you finance a car over 60, 72, or even 84 months. It's also worth noting that the differences are generally largest in the lower credit tiers. On a 48-month, $30,000 car loan, a borrower with a 580 credit score would pay nearly $1,300 more in interest over the loan term if the vehicle was used.

Why are used car interest rates higher?

There are a few reasons why lenders typically give higher interest rates for used cars than new ones.

For one thing, it's tougher to know how much a used car is truly worth, from a lender's perspective. Lenders typically don't inspect vehicles before offering loan terms, so there's a lot more uncertainty with used cars. Think about it this way. If you buy a brand new Honda Civic, the lender knows exactly what kind of condition the vehicle is in. If you buy a 2018 Honda Civic with 60,000 miles on it, there's a wide range of possible conditions it can be in at the time of purchase.

There's also statistical data that shows used car buyers are more likely to default on car loans than new car buyers. It's tough to say why this is, but one possible explanation is that a used car is more likely to have mechanical issues before the end of the loan term, and borrowers are less likely to make payments on a non-working vehicle, especially if they run into financial trouble.

The bottom line

While buying a used car can potentially save you money on the purchase price of your next vehicle, it can also be considerably more expensive to finance -- especially in the relatively high-interest environment we're in. To be sure, it can still make good financial sense to buy a used car, but when comparing your options, don't forget to include financing costs in your budget.