I would say that “psycho” is informal for “psychopath” - think serial killer. What’s the movie about? A psycho stalks some teenagers. “Lunatic” is more of a general imprecise word to describe someone acting crazily or irrationally, though I think that traditionally it might have been used differently - for example in “lunatic asylum”. He’s a lunatic obsessed with conspiracy theories.

In the US, both are used casually but I think psycho has more dangerous or ominous connotations, there is more animosity or spite in calling somebody a psycho. The word lunatic, often, has connotations of being more harmless than psycho. One would usually use lunatic more gently, I think, than psycho.

Thank you, Stephanie! :) It now makes sense for me.

I agree with the other responses. I will add that lunatic is a word that was used more in the 1800's. Psycho was a term that has been used more recently, perhaps in the 1970's to now. If the words are being used to casually comment about someone, calling a person psycho is more harsh and means they are possibly capable of serious crimes. Calling a person a lunatic would mean they have odd behaviors but are less worrisome, less demented. Two example sentences; "A lunatic who lives next door plays funny music with a child's toy horn at sunrise." 'A pschyo who lives next to me puts animal skeletons in the trash everyday."