Hasty decisions may lead to financial troubles. When buying a car, people tend to stretch their budgets to impress people around them. Buying your car is one of the most exciting things of your life, but if you are facing a shortage of funds, you can always go for a pre-owned car. Due to its lower upfront cost, a used car is a popular option for many first-time buyers. Getting a loan for buying a second-hand car is also easy as almost all banks and other financial institutions offer loans to buy such vehicles.
Who can apply?
Buying a new car could be costly, especially if it’s your first car. It may require additional funds for maintenance and a higher insurance premium. However, you can get a used car at a very attractive price. Also, the insurance premium is cheaper due to depreciation in the car’s value with time. A used car loan can help you own a car without putting too much strain on your finances. The minimum and maximum age of the borrower should be around 21 years and 65 years, respectively, to get a loan.
Adhil Shetty, CEO, Bankbazaar.com, says, “In most used car loans, the maximum repayment tenure is between one and five years, but, in some cases, banks may allow a repayment tenure of up to seven years. Lenders also check the borrower’s repayment capacity, such as the annual and monthly income, credit score, loan to value (LTV), etc. So, depending on your financial profile, credit score and repayment capacity, you can get a loan to buy a second-hand car.”
Other funding options
Besides self-funding or taking a loan to purchase an old vehicle, you also have other funding options available. You can take a secured or an unsecured loan. If you are ready to pay higher interest and charges and don’t want to pledge security with the bank, you can opt for a personal loan to buy a used car. On the other hand, if you want a secured loan, you can use assets like gold, securities like KVP, LIP, NSC, FDs, etc,. or mortgage your property to get a secured loan for buying a used car. The table below compares the interest rates of pre-owned car loans vis-a-vis alternative options for the loan.
Note: Interest rate on above-mentioned loan products is shown for 5 randomly selected banks. Data collected from respective bank’s website as on 26 July 2022. Lowest interest rate offered by the banks on respective loan product is shown in the table (irrespective of the loan amount or tenure). Interest mentioned in the table is indicative and it may vary depending on bank’s T&C. Data strictly for illustrative purposes.
(Compiled by Bankbazaar.com)
As you can analyse from the table, interest on a used car loan is comparatively cheaper than the personal loan and loan against securities for selected entities. Please note, above-mentioned alternatives don’t require you to hypothecate the car papers with the bank so that it can save you some money towards hypothecation charges.
Tips for borrowers
Loan to value (LTV) offered by the bank is an important factor you must consider while applying for a car loan to purchase a second-hand vehicle. The LTV usually varies from lender to lender and ranges between 50% to 90% of the assessed value of the used car. If you buy the vehicle from a bank’s pre-owned car dealers, you may get a loan at a better LTV ratio and lower interest rate. Also, do not forget to check the condition of the used car physically as well as its history through its service records from the authorised dealer.
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A pre-owned car can be a good value if you have done all your due diligence on the car and the loan you are taking to purchase the vehicle.
— Depending on your financial profile, credit score and repayment capacity, you can get a loan to buy a second-hand car;
— The maximum repayment tenure is between one and five years, though some banks may allow a tenure of seven years;
— If you are ready to pay higher interest and charges and don’t want to pledge security with the bank, you can opt for a personal loan;
— Loan to value is usually 50% to 90% of the assessed value of the used vehicle