Say your store is quoting a hypothetical buyer on a $28,000 used car. The buyer also has an offer on a comparable $32,000 new car with manufacturer-supported financing. Under the assumptions below, the new car requires a smaller monthly payment and less total repayment.
The buyer wants to avoid a payment that squeezes the household budget. Your salesperson wants to defend a used-car price that already looks competitive. Neither concern gets resolved by pointing to the $4,000 price difference.
The first comparison holds the term and down payment equal
For this hypothetical U.S. purchase, assume the used car has ordinary financing at 10.5% APR and the new car qualifies for a promotional 1.9% APR. APR means annual percentage rate, a yearly measure of credit cost. These rates are illustrative inputs, not market averages or advertised offers.
The Federal Trade Commission explains that manufacturers sponsor some low-rate financing programs, with restrictions that can include eligible vehicles, contract length and credit qualifications. The subsidy therefore belongs in the comparison, but so do its conditions. (consumer.ftc.gov)
Both offers require 60 monthly payments and $3,000 cash down. Assume sales tax of 6% on the selling price before any manufacturer rebate, plus $500 in nontaxable purchase fees. There is no trade-in or optional add-on.
Both loans have fixed rates and calculate interest monthly on the outstanding balance. Assume no separate credit charges, so APR equals the interest rate, with the first payment one month after financing. The calculations below round payments to cents and repayment totals to whole dollars, using unrounded payments to calculate those totals.
The new car wins despite the higher amount financed
With those assumptions, the two offers work out as follows:
- Used car: $28,000 price + $1,680 tax + $500 fees − $3,000 down = $27,180 financed. At 10.5% for 60 months, the payment is $584.20. Scheduled loan repayment totals about $35,052, including $7,872 in interest.
- New car: $32,000 price + $1,920 tax + $500 fees − $3,000 down = $31,420 financed. At 1.9% for 60 months, the payment is $549.35. Scheduled loan repayment totals about $32,961, including $1,541 in interest.
Including the down payment, the buyer pays about $38,052 for the used-car purchase and financing, versus $35,961 for new. The new car requires roughly $35 less each month and $2,091 less over the complete repayment period.
Your manager can now see the actual competitive problem. The buyer would borrow $4,240 more for new, but the lower interest expense more than offsets that difference. Neither extra cash down nor a longer repayment period created the advantage.
A rebate creates another offer to compare
The buyer then asks about taking cash back instead of the promotional rate. Add a hypothetical $2,500 manufacturer rebate that cannot accompany the 1.9% offer. Assume ordinary new-car financing is 10.5%, matching the used-car rate.
The new car still has a $32,000 selling price and $1,920 tax under this example's tax assumption. After the rebate and the same $3,000 down payment, the buyer finances $28,920. The payment becomes $621.60, with approximately $37,296 in loan repayment, or $40,296 including cash down.
Choosing the rebate reduces the starting debt, but it raises total purchase-and-financing outlay by about $4,335 compared with the promotional-rate offer. For this buyer, taking the smaller loan is more expensive because the higher rate outweighs the rebate.
At this decision point, your manager needs both complete new-car quotes. Combining the rebate-adjusted balance with the promotional rate would create an offer that this hypothetical program does not permit.
Without promotional approval, used regains the payment advantage
Now change the credit decision. Suppose the buyer does not qualify for 1.9%, but can still obtain ordinary financing at 10.5% and receive the $2,500 rebate.
The available new-car payment is now $621.60, against $584.20 for used. Used is approximately $37.40 cheaper per month, with the same term and buyer contribution. Your store no longer needs a price concession to win this particular payment comparison.
The FTC cautions that a buyer's credit history can limit access to manufacturer incentive rates. Your manager therefore needs the offer available to this applicant, rather than treating an advertised rate as an approved loan. (consumer.ftc.gov)
Matching the promotional payment takes about $1,530 off used
Return to the buyer who qualifies for 1.9%. Your manager now asks what used-car price would match the new car's payment without changing the down payment or term.
Working backward from the unrounded new-car payment, a 10.5% loan over 60 months supports approximately $25,558 in borrowing. With the same $3,000 down payment, $500 fees and 6% tax, the corresponding used-car selling price is about $26,470.
Your $28,000 used car therefore needs a price reduction of approximately $1,530. The amount financed falls by about $1,622 because the lower selling price also reduces sales tax. That is the concession to weigh against the vehicle's available margin.
A longer loan produces a different answer, but it changes the bargain. At the original used-car price and 10.5%, extending repayment to 72 months brings the payment down to $510.41. Scheduled loan repayment rises to approximately $36,750, and the buyer remains in debt for another year.
The Consumer Financial Protection Bureau recommends comparing borrowing amounts and rates alongside loan length and payments because extending a loan can increase interest expense. In this example, asking for roughly $1,622 more down would also match the promotional payment, but the buyer would fund that change. Neither alternative is a used-car price reduction. (consumerfinance.gov)
The financing result does not settle ownership costs
The buyer still needs to compare the vehicles beyond their loans. The Federal Trade Commission's warranty guidance explains that new-car manufacturer coverage has time or mileage limits, while used vehicles may also carry warranty protection. The relevant comparison is the actual coverage remaining on each vehicle. (consumer.ftc.gov)
Your used car's inspection findings and maintenance history should inform expected repair spending. A documented upcoming repair belongs in that discussion; an invented monthly repair allowance does not. Keep those estimates separate from the calculated loan payments so the buyer can distinguish a contractual obligation from an uncertain expense.
The buyer's intended ownership period also matters. For an earlier sale, compare cash down and payments through the sale date, add the remaining loan payoff, and subtract estimated resale proceeds. That resale estimate remains a forecast, unlike the scheduled repayment figures.
To finish this example, suppose the buyer qualifies for the promotion and your store holds its price. After reviewing coverage and planning to keep the vehicle through the loan term, the buyer chooses new. The used car had the lower purchase price, but that alone did not justify its higher payment.
Your competitive price depends on the buyer's available financing
For your own inventory decisions, a comparable new-car asking price is only part of the evidence. The competing loan can establish a payment target that requires a meaningful used-car concession, even when your advertised price is already lower.
The useful distinction is between changing the vehicle price and changing how the buyer pays. Once the available financing is established, you can decide whether the required concession fits your margin. Warranty protection and expected ownership costs then deserve their own comparison, without being used to disguise the financing result.
Frequently asked questions
Is APR the same as the loan's interest rate?
Not necessarily: APR incorporates certain credit charges as well as interest. The Consumer Financial Protection Bureau distinguishes the borrowing rate from this broader cost measure. The worked example assumes no separate credit charges, which makes the two rates equal; an actual quote may differ. (consumerfinance.gov)
What changes if the buyer plans to repay the loan early?
Compare costs through the intended payoff date rather than relying on full-term repayment totals. The Consumer Financial Protection Bureau's interest guidance explains that simple-interest loans calculate charges from the remaining balance. Paying that balance sooner changes the interest comparison and can change the relative value of a rebate. (consumerfinance.gov)
Check the payoff conditions as well. The Consumer Financial Protection Bureau's prepayment guidance notes that the contract and applicable state law determine whether an early-payment penalty applies. (consumerfinance.gov)
Does promotional financing matter to a buyer paying cash?
A buyer who takes no loan receives no interest benefit from a promotional APR. Under this article's hypothetical assumptions, used costs $30,180 including tax and fees, while new costs $31,920 after the $2,500 rebate. Used therefore has a $1,740 cash-purchase advantage before either vehicle's ownership costs are considered.