New vs Used Car Financing in Australia: What You Need to Know

The choice between buying a new or used car involves many factors, and financing is a significant one. The type of vehicle you choose affects the loan products available to you, the interest rates you will pay, and the overall financial equation of your purchase. This guide explores the key differences in financing new versus used cars in Australia.

Interest Rate Differences

One of the most notable differences between financing new and used cars is the interest rate. New car loans typically come with lower rates than used car loans. As of late 2024, new car loan rates from major lenders often start around 5.5 to 7 percent, while used car loans commonly range from 7 to 10 percent or higher.

Why the difference? Lenders consider new cars less risky. They hold their value better in the early years of the loan, come with manufacturer warranties, and have known mechanical histories. Used cars present more uncertainty regarding condition, potential repairs, and faster depreciation relative to the loan balance.

This rate difference has real financial implications. On a $25,000 loan over five years, the difference between 6 percent and 9 percent interest amounts to approximately $2,000 in additional interest paid. Use our car finance calculator to compare scenarios for different rates and loan amounts.

Loan Term Considerations

Loan terms available for new and used cars may differ. New car loans are commonly offered for terms up to seven years, giving buyers flexibility to lower monthly payments by extending the repayment period. Used car loans may have shorter maximum terms, often capped at five years, particularly for older vehicles.

Some lenders also set maximum vehicle age limits for financing. A common rule is that the vehicle age at the end of the loan term should not exceed a certain threshold, often 10 to 12 years. This means a seven-year-old car might only qualify for a three to five year loan depending on the lender.

The condition and type of used car matters too. Nearly-new vehicles that are one to two years old typically qualify for financing options similar to new cars, while older vehicles face more restrictions.

Depreciation and Equity

Depreciation affects both new and used cars but impacts financing considerations differently. New cars experience their steepest depreciation in the first few years, often losing 20 to 30 percent of their value in the first year alone. This creates a risk of negative equity, where you owe more on the loan than the car is worth.

Used cars have already absorbed much of this initial depreciation hit. While they continue to depreciate, the rate is typically slower and more predictable. This means the gap between your loan balance and the car's value may be smaller, reducing the risk of being upside down on your loan.

If you are considering a balloon payment structure, this depreciation factor becomes even more important. Setting a balloon on a new car requires careful consideration of how much value the car will lose over the loan term.

Total Cost of Ownership

When comparing new and used car financing, look beyond just the loan itself to the total cost of ownership. New cars typically come with warranty coverage that minimises repair costs in the early years. They may also be more fuel efficient and have lower maintenance needs initially. Some new cars qualify for cheaper insurance rates.

Used cars have a lower purchase price but may require more maintenance, especially as they age. Factor in the cost of a pre-purchase inspection for used cars, potential warranty purchases if not included, and the likelihood of repairs. An older car that saves you money on the purchase price but requires significant repairs may not be the bargain it appears.

Create a complete picture by estimating annual running costs for each option and adding them to your monthly loan repayments. This gives you a more accurate comparison of what each vehicle will actually cost you over time.

Manufacturer and Dealer Finance Options

New car buyers often have access to manufacturer finance deals that may not be available for used vehicles. These promotional rates, sometimes as low as 1 to 3 percent, are used by manufacturers to move inventory. While attractive, these deals often come with conditions such as specific models, limited deposit options, or restrictions on loan terms.

Always compare manufacturer finance offers with independent lenders. Sometimes the low rate is offset by a higher purchase price or you may be able to negotiate a better cash price and finance independently for an overall better outcome.

Dealer finance for used cars operates differently, often through broker arrangements with various lenders. The convenience comes at a cost, as dealer finance rates tend to be higher than going directly to a bank or credit union.

Deposit Requirements

Lenders may have different deposit expectations for new versus used cars. New car loans sometimes allow smaller deposits or even no deposit at all for borrowers with strong credit profiles. Used car loans may require a more substantial deposit to reduce the lender's risk, particularly for older or higher-mileage vehicles.

Regardless of lender requirements, providing a larger deposit benefits you. It reduces the amount you need to borrow, lowering your repayments and total interest paid. It also creates an equity buffer from day one, reducing the risk of negative equity.

Making the Right Choice

Neither new nor used is universally better for everyone. Your decision should consider your budget, how you will use the vehicle, how long you plan to keep it, and your risk tolerance. If you plan to trade in every few years and value warranty coverage, new might make sense despite the higher price. If you want to maximise value and are comfortable with potentially higher maintenance costs, a quality used car could be the smarter financial choice.

Calculate the total cost for each scenario including the purchase price, estimated interest using our car finance calculator, expected running costs, and the vehicle's likely value when you eventually sell or trade it. This comprehensive view helps you make a decision based on complete information rather than just the sticker price or monthly payment.