New and used car finance differ on depreciation, interest rates, and monthly costs. This explainer breaks down the key trade-offs so you can compare clearly before you commit.
This article provides general information only. It is not personalised financial advice. The right choice for you depends on your own circumstances.
What is the short answer?
New cars typically attract lower interest rates but higher monthly payments, because the car itself costs more. Used cars are cheaper to buy, but lenders often charge higher interest rates on older vehicles. The total cost of each option depends on three things: the car's price, the interest rate you are offered, and how long you borrow for.
Neither option is cheaper in every situation. The numbers depend on the specific car, the finance product, and your credit profile.
How do depreciation and car value affect the deal?
Depreciation is the loss in value a car experiences over time. It is one of the biggest hidden costs in car ownership, and it shapes how finance deals are structured.
A brand-new car typically loses around 15 to 25% of its value in its first year. By year three, many cars have lost 40 to 50% of their original price. This matters for finance because:
- On a Personal Contract Purchase (PCP) deal, the lender sets a projected future value figure at the start (sometimes called the balloon payment). The lender's estimate of how much the car will be worth at the end of the term is baked into your monthly payment.
- A new car's depreciation curve is steep and relatively predictable, which makes it easier for lenders to set that figure with confidence.
- A used car has already absorbed much of its early depreciation. That means less value lost during your ownership period, but the lender's projected future value figure on a used PCP deal will be lower in absolute terms.
For hire purchase (HP) deals, depreciation matters less directly, you are simply repaying the car's price plus interest. But it becomes relevant if you need to sell or part-exchange the car before the end of the agreement.
How do interest rates compare on new and used car finance?
In plain English, new car finance often comes with lower interest rates than used car finance. There are two reasons for this.
Manufacturer offers. Car manufacturers regularly subsidise finance deals on new cars through their captive finance arms. These promotional rates can be significantly below the market rate for a standard loan. Used car deals rarely attract this kind of manufacturer support.
Lender risk. When a lender finances a car, the car acts as security. A newer car is easier to value and resell if something goes wrong. An older car with higher mileage carries more uncertainty. Lenders often price that uncertainty into a higher APR on used finance.
That said, lower interest rates on new car finance do not always mean a lower overall cost. Because the purchase price is higher, you are borrowing more, and a small rate difference can be outweighed by the larger sum.
Comparing new and used car finance side by side
The table below illustrates how the two options typically differ. Numbers are for illustration only and will vary by lender, car, and credit profile.
| Factor | New car finance | Used car finance |
|---|---|---|
| Purchase price | Higher | Lower |
| Typical APR | Often lower (inc. manufacturer deals) | Often higher |
| Monthly payment | Usually higher (larger loan) | Usually lower (smaller loan) |
| Depreciation during term | Steeper in early years | Slower (much already absorbed) |
| PCP balloon payment figure | Set on new car residual value | Set on used car residual value |
| Manufacturer finance offers | Common | Rare |
| Warranty coverage | Full manufacturer warranty typical | Varies; may be limited or expired |
A useful first step is to calculate the total amount repayable on each option, not just the monthly payment. A longer term or higher rate can make a cheaper car cost more overall.
What about PCP deals specifically?
PCP (Personal Contract Purchase) is one of the most common car finance products in the UK, and it works differently from a straightforward loan.
With PCP, your monthly payments cover the difference between the car's purchase price and the lender's projected future value figure, plus interest. At the end of the term you have three choices:
- Hand the car back (if it is within the agreed mileage and condition limits).
- Pay the balloon figure to own the car outright.
- Use any equity (if the car is worth more than the balloon figure) as a deposit on a new agreement.
On a new car PCP, the projected future value is often set with more confidence. Manufacturer-backed deals sometimes offer a lower rate on top.
On a used car PCP, the balloon figure is lower in absolute terms because the car's starting value is lower. The interest rate may be higher. The monthly payments are often lower than a new car PCP for the same term, but you need to check the total amount repayable to make a fair comparison.
One thing worth noting: if you hand a used car back at the end of a PCP deal, there is less likelihood of it being worth significantly more than the balloon figure. On a new car PCP taken out just before a model refresh, the car's residual value might fall more sharply than expected.
What to consider before choosing
Before deciding between new and used car finance, it can help to check the following:
- Total amount repayable. Compare the full cost over the term, not just the monthly payment. Your lender is required to show this.
- APR. A lower APR is better, but only meaningful when you are comparing the same loan amount and term length.
- Term length. Spreading payments over a longer period reduces monthly costs but increases the total interest paid.
- Equity position. With PCP especially, think about where you will stand at the end of the term. Will the car be worth more or less than the balloon figure?
- Warranty and reliability. New cars come with a manufacturer warranty. Older used cars may have expired warranties, which adds to running costs.
- Mileage allowance (PCP). PCP deals come with an agreed annual mileage. Exceeding it incurs charges regardless of whether the car is new or used.
Frequently asked questions
Is new car finance always more expensive than used?
Not always. New cars often attract lower interest rates and manufacturer offers that used cars do not. But the car itself costs more, so monthly payments are usually higher. The total you repay depends on the car's price, the rate, and the term length.
Why do used cars sometimes have higher interest rates?
Lenders treat older cars as higher-risk security. If you default, a three-year-old car is harder to sell at a predictable price than a brand-new one. That extra risk is often priced into a higher APR on used car finance.
What is a balloon payment on a PCP deal?
At the end of a PCP agreement, you have the option to pay a large lump sum (the balloon payment) to own the car outright. If you do not pay it, you simply hand the car back. The balloon figure is set by the lender at the start of the agreement.
Can I get PCP finance on a used car?
Yes. PCP is available on used cars, though the terms and residual value figures differ from new car deals. Used PCP may carry a higher interest rate, and the car's age and mileage affect how the lender sets the balloon figure.
Does buying new or used affect my credit file differently?
The type of finance product (PCP, HP, personal loan) affects your credit file more than whether the car is new or used. Any finance agreement will show on your credit file and missed payments will be recorded regardless of the car's age.
Is depreciation relevant when comparing finance deals?
Yes. Depreciation affects the equity you hold in the car during the agreement and the balloon figure on PCP deals. A new car depreciates sharply in its first year, which matters if you plan to sell or part-exchange before the end of the term.
Related reading
For a broader overview of car finance products and how they work, see the Car Finance guide.
Sources
- MoneyHelper, guidance on car finance options and PCP explained. moneyhelper.org.uk
- Financial Conduct Authority (FCA), regulation of consumer credit including motor finance. fca.org.uk
- Is new car finance always more expensive than used?
Not always. New cars often attract lower interest rates and manufacturer offers that used cars do not. But the car itself costs more, so monthly payments are usually higher. The total you repay depends on the car's price, the rate, and the term length.
- Why do used cars sometimes have higher interest rates?
Lenders treat older cars as higher-risk security. If you default, a three-year-old car is harder to sell at a predictable price than a brand-new one. That extra risk is often priced into a higher APR on used car finance.
- What is a balloon payment on a PCP deal?
At the end of a PCP agreement, you have the option to pay a large lump sum (the balloon payment) to own the car outright. If you do not pay it, you simply hand the car back. The balloon figure is set by the lender at the start of the agreement.
- Can I get PCP finance on a used car?
Yes. PCP is available on used cars, though the terms and residual value figures differ from new car deals. Used PCP may carry a higher interest rate, and the car's age and mileage affect how the lender sets the balloon figure.
- Does buying new or used affect my credit file differently?
The type of finance product (PCP, HP, personal loan) affects your credit file more than whether the car is new or used. Any finance agreement will show on your credit file and missed payments will be recorded regardless of the car's age.
- Is depreciation relevant when comparing finance deals?
Yes. Depreciation affects the equity you hold in the car during the agreement and the balloon figure on PCP deals. A new car depreciates sharply in its first year, which matters if you plan to sell or part-exchange before the end of the term.