Although the desire to buy a new car is common for most consumers, not everyone can fulfil their desire. The desire becomes even more unattainable when the buyers have a favourite brand or car model with a hefty price tag in mind. Fortunately, the concept of buying used or pre-owned cars has changed the scenario to a great extent that now you need not wait for decades to own a car of your choice. You can easily purchase a used model of your favourite brand at a much lower price than what you would have to pay for a new car. This is why used car purchase has increased a lot these days with more people opting for this.
Used or pre-owned cars are referred to those cars which have been purchased and used by someone for a certain time period and then sold off. Since these cars are not brand new, these can be purchased at a cheaper rate than the new ones. However, even if a used car is cheaper compared to a new car, the buyers still need a large amount of money to make the purchase. This sometimes overshoots their budget and they face difficulty in managing the extra fund that is required. To help out such buyers who need extra money to buy an old car of their the choice, a special type of car loan is offered by the banks known as a used car loan. In simpler words, this type of loan facilitates the consumers to buy their desired car without stressing their existing budget or waiting too long to save the required amount on their own.
Here are the basic differences between a used car loan and a new car loan which a borrower must know before taking a loan:
While used car loans are offered to people who are willing to buy a used or pre-owned car, new car loans are provided for buying brand new cars. This is the reason that the interest rate of used cars varies from the interest a rate of the new cars. A used car loan is offered separately from new car loans and the interest rate and other terms and conditions also vary. The borrowers can decide how much they actually want to borrow and for what time period. The rate of interest on the loan will depend upon the type of the used car the buyer is going to purchase. The best thing is, there are a plenty of offers on the used car loans which you can avail while purchasing the car. This will lower the monthly EMIs and you can remain stress-free and repay the loan amount slowly as per your convenience.
When buyers opt for a used car loan, they want to get the low interest rate on the same to make some significant profit. But in reality, the interest rate of used car loan works in a different way. There are a number of factors based on which the interest rates of a used car loan is fixed. Let's have a look at the vital factors that decides the interest rate:
The age of the car that you are going to purchase plays a vital role in deciding the interest rate. Offering loan on a used car is a risky matter for the banks and this is why they charge higher interest rate on such loans compared to the interest charged on a new car loan. Usually, most of the banks offer loan on cars that are not more than 3 years of age because of high depreciation of its value. The older the car is, the interest rate charged by the bank will be higher. Since very old cars are prone to sudden functional meltdown, the lenders try to fetch some value of the car by charging higher interest rates on them.
When a borrower takes loan to purchase a used car banks automatically consider the car as the collateral of the loan. The car needs to be hypothecated to the bank during the loan tenure so that the bank can seize the car in case the borrower defaults on the loan. The bank will later sell off the car in order to accumulate the unpaid or outstanding loan amount. As such, it is crucial for the banks to take the car model into account while finalising the rate of interest of the loan since every car model or brand may not get sold at a price expected by the banks during the sale. In other words, the resale value of the popular and newly launched car models is higher than that of the less popular or older models.
Another very important decisive factor of used car loan interest rate is the credit score of the borrower. Banks while providing loans on used car wants to make sure that the borrower is creditworthy and won’t default on the loan. Since a used car will gradually get depreciated, the banks are at a risk as if the borrower default on the loan then the lender mightn’t collect the full amount by selling off the car. Hence, the banks usually charge high-interest rate to collect some value of the car in the form of EMIs. However, if the borrower has a very good credit score of 750 or more with no history of loan defaulting, he or she can negotiate with the bank and the bank offers him/her a good deal on the rate of interest.
In case of a used car, the loan repayment tenure plays a really big role. As a used car depreciates in its value during a loan with every passing year, the lender wants to collect to minimise its risk by getting some amount in the form of interest during the loan tenure. For this same, based on the loan tenure opted by the borrower the interest rate is decided by the bank. Usually, the banks charge a higher rate of interest on the loan which is taken for a shorter tenure and lesser interest rate for loans that are taken for longer tenures.
If the income level of the borrower is good then it implies that he or she is capable of paying the loan interest on time without defaulting or delaying. Lower the debt-to-income ratio, better for the borrower as that will instill more confidence in the lender about his or loon repaying abilities. And this increased trust of the bank on the borrower increases his or her chances to get a loan at a lower rate of interest.
The down payment made on a loan by the borrower is yet another factor that decides the interest rate of a used car loan. If the borrower pays a higher amount of money as down payment, then the bank has to pay a lesser amount in the form of loan. And when the banks less money, its risk also goes down. This is why the bank offers loan to such borrower in low-interest rate. Also, borrowers who make high amount of down payment are considered to be financially sound and the banks feel more confident to offer them a loan.
The customers need to keep in mind the below-mentioned points while opting for a used car finance to get the best benefit out of it:
Most of the leading Indian banks offer loans to the buyers of used cars at a very nominal interest rate. The rate of interest varies from individual to individual as most of the banks charge a slightly low-interest rate for the female applicants. The used car interest rate is decided by the banks on the basis of multiple criteria. Here are some of the factors on which the interest of used car loan depends:
Though the borrowers often think that the interest rate of the used car will be lesser compared to the interest that is charged on a new car, the actual scenario is completely different. Used cars are actually old cars which have less depreciation value as well as physical value to the users. So, offering a loan on a used car is a kind of risk for the banks. However, with a target of achieving greater rewards by taking greater risks, they offer a good amount of loan for the purchase of second-hand cars but with a higher rate of interest. But there are still by following the given ways, a borrower can arrive at a good used car loan deal:
Here are some of the top banks in the country that offer used car loan in India with their interest rates:
|Bank||Interest Rate||Loan Scheme||Criteria|
|State Bank of India (SBI)||12.60% p.a.||Certified Pre-owned Car Loan Scheme||For certified used cars which are not more than 5 years old.|
|HDFC Bank||11.50% p.a. to 17.50% p.a.||Pre-owned Car Loan Scheme||Interest rate depends on the age and the segment of the car.|
|ICICI Bank||15% p.a.||Used Car Loans Scheme||Rate of interest depends on the segment of car, its age, the loan tenure and loan types like refinance, top up, etc.|
|Bank of India (BOI)||9.15% p.a.||Star Vehicle Loan Scheme for 2nd Hand Vehicle Scheme||The age of the second hand vehicle shouldn’t exceed 3 years.|
|Axis Bank||14.50% p.a. - 16.25% p.a.||Pre-owned Car Loan Scheme||The borrowers can avail a loan for a maximum tenure of 5 years.|
|Federal Bank||9.15% p.a. – 9.45% p.a.||Personal Car Loan for Used Vehicles Scheme||The pre-owned car shouldn’t be more than 3 years.|