Financing a car is one of the most common reasons people borrow money. Understanding how car loans work, and how new and used car financing differ, helps you avoid overpaying.
How a car loan works
A car loan is a secured loan, meaning the vehicle itself acts as collateral. You repay the amount borrowed plus interest in fixed monthly installments, usually over three to seven years. If you stop paying, the lender can repossess the car.
New car financing
New cars usually qualify for the lowest interest rates and sometimes special promotional financing from manufacturers. The downside is that new cars lose value quickly, so you may owe more than the car is worth in the early years.
Used car financing
Used car loans often carry slightly higher interest rates, but you borrow less because the vehicle is cheaper and has already taken its biggest depreciation hit. This can make a used car the more economical overall choice.
Tips before you sign
Get pre-approved from a bank or credit union so you can compare it against dealer financing. Focus on the total cost and APR, not just the monthly payment, and keep the loan term as short as you can afford.
The bottom line
New cars offer the lowest rates but faster depreciation, while used cars mean a smaller loan. Shop your financing separately from the car itself to get the best deal.
Disclaimer: This article is for general information only and is not financial advice. Loan terms, interest rates and eligibility vary by lender and change over time. Always read the loan agreement and consult a qualified financial professional before borrowing.