Buying a car is still a dream for many despite a plethora of lenders and financing options available in the market. What creates the hindrance for purchasing a new car is that most people are not able to meet the eligibility criteria of income, work experience, etc. Moreover, the income criteria differ across different car models. You would often want to buy a premium model, but lesser salary may have been creating the roadblocks in the way of purchasing the car. However, you can take solace from the fact that the value of car depreciates the moment it goes out of the showroom.
The rate of depreciation could be between 10-20% in the first year itself. For example – You can buy a year old Skoda Octavia RS, whose new models are available for about Rs 15 lakhs, at a much lesser price of around Rs 10 lakhs. Further, an old model of Honda Accord can be available at the cost of new Maruti Swift. So, you should not worry much if you fail to buy a new model as the price could drop considerably a year or two later on account of depreciation, thereby widening your possibility of meeting the eligibility parameters set by the lender for a loan on the used vehicle. Either you can take a used car loan or avail a personal loan to buy the desired pre-owned vehicle. So, before you avail any option, make sure you understand the intricacies of both to experience a bumpy-free ride during your loan journey. With a view to help you feel the same, we have come with a host of factors that will guide you to the right path.
1. Interest Rate
The most crucial factor one should look into is the interest rate at which the loan is offered. Lesser the interest rate, lower is the payout from your end each month. Interest rate on used car loan ranges from 13%-20% per annum across lenders, while it goes up to 14%-25% in the case of personal loan. Though it seems personal loan is expensive than used car loan, but in some cases the interest rate can get lower in the former. As of now, we can check out below the existing interest rates of both used car loan and personal loan across major financing institutions in India.
2. Quantum of Finance
In case of used car loan, you can get a finance of upto 70%-80% of the valuation amount. Suppose the price of a old car is Rs 5 lakhs and a lender calculates its valuation to be Rs 4 lakhs then you would be eligible for a loan amount of Rs 2.8-3.2 lakhs. You will have to pay a remaining amount of Rs 1.8-2.2 lakhs, which include the amount for down payment, from your pocket. With personal loan, you can pay off the full cost of the car without having to pinch your pocket, provided you get the loan amount equivalent to the price of the vehicle.
3. Loan Tenure
The tenure of used car loan ranges upto 5 years across most lenders in India. The age and condition of the second hand car also influence the loan tenure. More the age of the car, lesser will be the tenure of loan. However, you should not buy a car used for more than 5 years as you won’t get the finance for such a vehicle. The loan tenure can be upto 5 years in the case of personal loan to buy a pre-owned car.
4. Credit Score
In the event of a poor credit score, you may get denied personal loan, which is an unsecured loan. In case of personal loan, credit score plays a critical role in loan approval process and the setting of interest rates by the lender. Low credit score can lead to a higher interest rate on personal loan. It is where used car loan pips personal loan as the former is a secured loan and thus the interest rate would be lower compared to the latter.
On the economical front, used car loan is better than personal loan due to lower interest rates. But, the loan amount eligibility can be more in case of a personal loan. If you have the requisite cash available to pay the down payment, it is advisable you opt for used car loan to reduce the interest outgo from your pocket.
The author is Founder, Deal4Loans.