The Average Used Car Payment Is $200 Less Than a New Car -- Here's Why That Matters (Besides Cost)

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Data from Experian shows the average monthly payment for a used car is $523, while the average cost of a new car is $735 per month. Which means buying a used car could mean spending $200 less per month.

If you're buying a car, the cost of your monthly payment matters. Spending less on your car means more money in your budget to cover costs like car insurance, investments, and housing. But let's put the budget aside for now. What other impacts can spending $200 per month less on car payments have on your life?

Lower monthly payments give you more flexibility in loan terms

By purchasing a used car and paying a lower monthly payment, you'll have more wiggle room in your budget to adjust your loan term. You can use this flexibility to pay the car off faster and save thousands on interest.

According to Experian, the average loan length for a used car loan is 67.4 months. With an average interest rate around 10.488%, you'll pay around $6,508.90 in interest over the life of the loan if you purchase a used car for $20,000 and pay $395.66 per month. (Possibly a little more if you wrap taxes and registration fees into the loan; less if you make a down payment.)

But if you shorten the loan to 36 months for the same car, you'll pay $649.94 per month (still below the average monthly payment for a new car) and pay just $3,397.69 in interest over the life of your used car loan. That extra $3,111.21 you would have paid in interest can be invested, saved, or used for other household expenses.

Used cars often have lower insurance rates

In addition to a lower monthly car payment, buying a used car may also come with cheaper car insurance rates. Since used cars are generally valued less than new cars, car insurance rates tend to be lower.

New cars also usually cost more to repair, which can also lead to higher insurance rates. So in addition to paying $200 less per month in car payments, you could save hundreds per year by having access to cheaper car insurance rates.

Used cars depreciate less than new cars

According to Kelley Blue Book, the average new car will lose 20% of its value in the first year -- which means you could quickly owe more than your car is worth (known as being underwater on the loan).

Used cars, on the other hand, have a lower depreciation rate. For example, the average Toyota Camry depreciates $5,059 in year one, but only depreciates $1,176 between years seven and eight. This means you're likely to get closer to what you originally paid if you need to sell or trade in your car.

There's an opportunity cost to paying more

Paying $200 per month extra on your car payment might not seem like a huge deal. Depending on your budget, it may not be. But there's also an opportunity cost that many people don't consider. What if instead of paying $200 more on your car loan, you invested the money?

The average rate of return for the stock market is 15.44% in 2024, so if you saved $200 per month for six years with that return, the average length of a used car loan, you could have a portfolio worth $24,982, with $14,400 in contributions and $9,382 in growth.

Now, let's look at the true cost of buying a new car. It'll cost you (on average) around $200 extra per month, hundreds more per year in higher insurance rates, will depreciate faster, and could have an opportunity cost of $9,382.

Even after all that math, you might still crave that new car smell. And buying a new car is OK, if it works for your budget. Just make sure you're considering all the different ways buying new can impact your finances.

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