There are two main reasons why people buy used cars — either they are on a tight budget or they want to hone their driving skills in a used car before graduating to a new car. In the former case, a used-car buyer is also most likely to get his car financed by a loan. However, unlike new car loans, approval and value of used-car loans are subject to certain conditions, age and model of the car. Moreover, interest rates on used car loans are generally 3 per cent–5 per cent more than new car loans. While most lenders finance up to 100 per cent of the new car value, in case of used cars, they usually finance 75 per cent – 80 per cent of the car value. In such a scenario, can a personal loan work out as cheaper and more flexible option? Let’s find out.
1. Interest rate: Personal loans are tad economical than used car loans as far as interest rate is concerned. Typically, interest rate on used car loans can range between 15 per cent and 18 per cent vis-à-vis 11 per cent – 24 per cent, as charged under personal loans.
2. Amount of loan: Usually, lenders offer 70 per cent–90 per cent of the value of the used car as loan. Again, the amount of the loan to be disbursed depends on the value of the car as determined by the lender. This can be lower than the price negotiated by you. So, if the negotiated price of the used car is Rs 6 lakhs and the value determined by the bank is Rs 5 lakhs, you can avail a loan of up to Rs 4 lakhs (i.e. 80 per cent of Rs 5 lakhs). The differential amount of Rs 2 lakhs, of which Rs 1 lakh will be down-payment, would be borne by you.
In contrast, if you avail a personal loan of Rs 6 lakhs, you can spend the entire loan amount for car purchase without spending anything from your own pocket. This would be especially beneficial if the rate of interest of your personal loans works out to be lower than the available used-car loans.
3. Loan duration: For used-car loans, banks and non-banking financial institutions offer tenures of up to 5 years. However, this is subject to age and condition of the used car. Therefore, if you purchase a 4 year old car, the maximum tenure of your used car loan will be 4 years.
Where used car loans score over personal loan:
Personal loans are unsecured loans and hence, your credit score will play a major role in determining the interest rate, and even whether your personal loan application is approved at all. Here, your low credit score could translate into higher rate of interest.
On the other hand, used-car loans are secured loans wherein the used car would serve as security. This increases the probability for someone with lower credit score to get his loan approved. Also, it is quite possible that the interest on used-car loans would be lower than what is being offered through personal loans.
Both used car loan and personal loan have their own strengths and limitations. Consider personal loan if you are looking at higher loan amount at a relatively lower interest rate. Used car loan, on the other hand, may be considered if you have lower credit score.
(The author is managing director of Paisabazaar.com)