Are More Drivers Financing New or Used Cars?

Are More Drivers Financing New or Used Cars? article image.

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According to Experian data, drivers finance used cars at a higher rate than they do new cars. While almost all new cars are financed (85.5%), they still make up a smaller share (40.8%) of the total auto financing market. Not only that, there is a big divide in creditworthiness for carbuyers who finance new vs those who finance used vehicles.

Buckle up to find out more about how consumers are financing new and used cars in 2020.

What Are Consumers Financing More in 2020?

Used cars clearly won the financing race when it came to cars purchased in the second quarter (Q2) of 2020, according to Experian's State of the Automotive Finance Market Report. In Q2 2020, used cars made up 59.3% of all vehicle financing, compared with 40.8% for new cars, Experian data shows. Those figures were nearly the same in the second quarter of 2019.

The tally shows 85.4% of new cars sold were financed, either with a loan or lease, compared with 36.8% of used cars. In the Q2 2019, those figures were 87.6% for new cars and 40.3% for used cars. Many more vehicles sold in the U.S. are used rather than new—more than twice as many last year, according to Edmunds—so even while most new cars are financed, sheer numbers mean used cars still comprise the majority of the finance market.

Meanwhile, the percentage of new cars that are leased fell in Q2 2020, according to Experian. In this year's second quarter, the share of all new cars that were leased stood at 25.8%, down from 32% during the same period in 2019. The share of used cars in the leasing market barely budged, going from 9.7% in the second quarter of 2019 to 9.5% in the second quarter of 2020.

New vs. Used Auto Loans by Credit Score

The automotive report also revealed differences in the credit scores for consumers financing used cars versus those financing used cars. Average credit scores for buyers of new cars were in the low 700s during the second quarter, while average credit scores for buyers of used cars ranged from the low to high 600s. In both categories, average credit scores are generally on the rise.

Average Credit Scores for Borrowers Financing New Cars
Q2 2016Q2 2017Q2 2018Q2 2019Q2 2020
Leases716722722724729
Loans708711711713718
All financing710721715717721

Source: Experian State of the Automotive Finance Market

Average Credit Scores for Borrowers Financing Used Cars
Q2 2016Q2 2017Q2 2018Q2 2019Q2 2020
Franchise dealers674673680680682
Independent

dealers

608611616617615
All dealers648652655656657

Source: Experian State of the Automotive Finance Market Report

Now that you've digested all of that information, you might be wondering: What's a good credit score for an auto loan, and what's the lowest credit score possible? Unfortunately, there's no clear answer.

Lenders use several credit scoring models to determine whether you'll be approved for an auto loan, and what the interest rate and other terms will be. However, the better your credit score is, the better your odds of being approved will be. Also, you stand a better shot at favorable terms if you have a credit score that's desirable in the eyes of the lender.

Even if you have what's considered a low credit score, you very well could be approved for an auto loan. Standards vary from lender to lender. There's no set cutoff point between a credit score that'll lead to an approval of your loan application and a credit score that'll lead to rejection of your application. Of course, a higher score tends to result in a lower interest rate and other favorable terms.

The Experian report analyzed the creditworthiness of borrowers who finance used and new vehicles. Credit score ranges can vary based on the scoring model, the lender, the type of loan and other factors. For this report, Experian defined the ranges as follows:

Super prime: 781-850
Prime: 661-780
Nonprime: 601-660
Subprime: 501-600
Deep subprime: 300-500

Experian found that most new car financing is done by those with the highest (prime or better) credit scores, while nonprime and subprime buyers make up a combined 46.9% of used car loan borrowers. Subprime loans for new cars are at an eight-year low, according to the Experian report.

Is It Easier to Finance a Used or New Car?

Whether you choose to finance a used car or a new car, there are benefits and trade-offs to be considered in either case.

Financing a Used Car

Generally, it's easier to finance a new car than a used car. A key reason: It's less difficult for a lender to determine the value of a new car versus a used car. A lender takes the value of a car into consideration when it arranges financing.

Of course, it makes sense to finance a used car if you lack the money to pay for it entirely in cash.

Furthermore, it could be appealing to finance a used car as opposed to a new car because the monthly payments tend to be lower. Experian's State of the Auto Finance Market Report shows that in Q2 2020, the average monthly loan payment for a used car was $383. By comparison, the average monthly loan payment for a new car was $568.

Another potential benefit of financing a used car: You might be able to make a lower down payment—perhaps 10%—on a used car loan instead of a higher down payment of maybe 20% for a new car loan. Or the lower cost of a used car might allow you to make the same down payment amount you would have on a new car but cover more of the car's value.

Financing a used car will also save you from the rapid depreciation usually associated with new cars. A new car declines considerably in value after the first year (about 20%), whereas a used car already has lost a chunk of value.

Financing a New Car

For those who can afford it and would prefer to drive a car fresh off the assembly line, financing a new car instead of a new one might be the right route to go. Why? For one reason, interest rates for new car loans ordinarily are lower than they are for used car loans. Experian data indicates that the average interest rate for a new car loan was 5.2% in the second quarter of 2020, compared with an average of 9.7% for a used car loan.

Also, a new car loan typically gives you a longer payoff period than a used car loan. According to Experian's State of the Auto Finance Market Report, the average term for a new car loan in the second quarter of 2020 was 71.5 months vs. 65.3 months for a used car loan. A longer loan term could be a blessing or a curse, however, as it could decrease your monthly payment amount but mean you'll be paying off the debt longer and are likely to pay more in interest over the course of the loan.

The Bottom Line

Whether you decide to finance a new or used car, it's wise to check your credit report and credit score before you shop for the vehicle and the loan. You can get a copy of your credit reports from all three major consumer credit bureaus through AnnualCreditReport.com. And Experian can supply a free credit report and score to help you head down a smooth financial road.

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