New Car Loan vs Used Car Loan – Which is Right for You?
When it comes to buying a car, one of the biggest questions is: Should I buy a brand-new car or go for a used one? Both choices have their pros and cons, and your decision usually boils down to budget, lifestyle, and financing options. Let’s compare the two and help you decide whether a new car loan or a loan on car (used car financing) makes more sense for you.
What is a New Car Loan?
A new car loan is financing you take when buying a brand-new vehicle directly from a dealership. Banks and NBFCs usually cover up to 80–90% of the on-road price, depending on your credit profile.
Pros of a New Car Loan:
- Lower interest rates compared to used cars.
- Longer repayment tenure (up to 7 years with some banks).
- Easy approval process as lenders prefer financing new cars.
- More advanced features, warranty benefits, and lower maintenance costs in the first few years.
Cons of a New Car Loan:
- Higher EMIs because new cars cost more.
- Immediate depreciation — the moment you drive off the showroom, the used car value drops by 5–10%.
What is a Loan on Car (Used Car Loan)?
A loan on car, in this case, refers to financing a pre-owned vehicle. With the rise of certified car dealers and platforms, buying a used car has become more reliable, and banks now actively finance these purchases.
Pros of a Loan on Car (Used Car Loan):
- Lower purchase price → smaller loan amount → lower EMIs.
- Slower depreciation compared to new cars (the first owner bears the biggest hit).
- Growing market for certified pre-owned cars, which means better resale options.
Cons of a Loan on Car:
- Slightly higher interest rates than new car loans (usually 1–2% more).
- Shorter tenure (generally 3–5 years).
- The lender will always check the used car value before approving financing, which can limit how much you get.
What About a Loan Against Existing Car?
Here’s another option many forget: if you already own a car, you can use it as collateral to get a loan against existing car. Unlike a new or used car loan, you don’t have to buy a new vehicle—you just unlock funds from the car you already own.
This can be a smart choice if:
- You don’t want to commit to buying another vehicle.
- You need liquidity but want to keep using your current car.
- You want flexibility on how you use the loan (no restrictions like in auto loans).
New vs Used: Key Comparison
Factor |
New Car Loan |
Loan on Car (Used Car Loan) |
Loan Amount |
Up to 80–90% of car price |
Based on used car value (50–80%) |
Interest Rates |
Lower (8–11% approx.) |
Higher (10–15% approx.) |
Tenure |
Longer (up to 7 years) |
Shorter (3–5 years) |
EMI |
Higher (due to bigger loan size) |
Lower (due to smaller loan size) |
Depreciation Impact |
High in first 2–3 years |
Lower (car already depreciated) |
Documentation |
Minimal, quick approvals |
More checks (ownership, RC transfer) |
Which One Should You Choose?
- Choose a new car loan if you want the latest features, long warranty, lower maintenance, and don’t mind paying higher EMIs.
- Opt for a loan on car if you want an affordable option, lower EMIs, and are okay with a slightly older model.
- Go for a loan against existing car if you already own a vehicle and simply need funds for personal or business use.
Final Thoughts
There’s no one-size-fits-all answer. If your heart is set on a brand-new ride, a new car loan gives you flexibility and longer tenure. But if you’re budget-conscious, looking for value, and want to minimize depreciation losses, a loan on car for a pre-owned vehicle is the smarter option. And if you’re not looking to buy at all but need cash, a loan against existing car might be the best-kept secret in auto financing.