Loans for ‘used cars’

The ‘used car’ segment has finally come of age and financers are all over the ‘road’ with attractive loan schemes. Let’s gear up on the ABCs of buying a previously owned vehicle on loan.
With car prices racing ahead and a clutch of new models being launched ever so often, every car buyer is faced with a dilemma.

We all aspire to own a new car but with the costs involved, many of us put the brakes on the purchase. However, with the ‘used car’ segment getting more organized and lenders aggressively financing used cars, one need not wait any longer to get into the driver’s seat.

So, if a prospective buyer wish to own his dream on wheels or are looking to upgrade to a bigger car without having to shell out those extra bucks, then he can consider taking a secondhand car on loan.

Most of the popular authorized car dealers have a ‘pre-owned car’ section as well. They buyer can scan for information on used cars in the classifieds section in newspapers as well as on the internet. Besides this, some lenders also hold regular ‘car exhibitions’ to sell used cars which they have possessed from borrowers who have defaulted on their car loans or owners intending to sell their existing cars. Apart from the organized ‘used-car’ mart, you can also buy a secondhand car from a friend or a relative.

Most public sectors, private and foreign banks offer loans for used cars. Most secondhand car dealers have tie ups with one or more lending institutions to offer loans, for instance, Maruti has a tie up with State bank of India.

Various terms on which the buyer can avail of a loan for a used car:

Valuation of the car:
Once you make up your mind on the car that you wish to buy, the lender will carry out a valuation of the car. This involves ascertaining the car’s mileage, engine condition, physical attributes etc. and putting a price to the car. The loan sanctioned to you will depend on the valued price of the car by the lender and not by the seller. Only once this valuation is completed, the loan process can be carried forward.

Age of car:
Since a used car is an already depreciated asset, most lenders will finance cars which are not more than 5-6 years old. For instance, HDFC bank offers secondhand car loans only for models which are less than 5 years old. Most financers also have a maximum cap on the age of the car during maturity of the loan. For example, ICICI bank finances only those used cars that are not more than 10 years old at the end of the loan tenure.

Margin money:
Depending upon the car’s model, age, condition lenders extend finance for 60 to 70 per cent of the assessed value of the car. The remaining margin (also known as down payment) of 30 to 40 per cent needs to be paid upfront by the buyer before he can take on the loan.

Interest rate:
Secondhand car loans attract a greater interest rate than those for new cars. The rates range between 14 to 18 per cent, depending upon the car model, year of manufacture, loan tenure, credit history of borrower, etc. Interest rates for big cars are generally lower, since the loan amount is higher.

The buyer can negotiate the interest rate by 0.5 to 1 per cent if he makes a higher down payment, or obtain the loan for a smaller tenure or go in for a car in the luxury segment.
In addition to interest costs, used car loans are also accompanied by processing fees and prepayment charges and these vary between lenders.

Loan Tenure:
The loan tenure for a pre-owned vehicle is much lower than that for a new one. Repayment on a used car loan is restricted to 4-5 years, depending upon the lender, car model, age of the car, loan amount etc.

Before getting your loan disbursed, you are required to submit your loan documents such as proof of income, bank statements etc. Apart from these standard documents, you also need to hypothecate the car in the bank’s favor, since the car will act as collateral for the loan.

The buyer can manage car loan better if he proceeds in the following manner:

Remember that a car is a depreciating asset unlike a home. Unless the buyer is extremely passionate about owning a swanky model, he must buy what he needs and not what he wants or else he may land up burdening himself with a larger loan.

Make as much down payment as one comfortably can and keep the financing for as short tenure as possible. Search online to get the lowdown on pricing and loan options of various secondhand cars. Contact several dealers and lenders to get the best deal on the car as well as the loan.

The buyer can customize his loan by opting for a step up or step down EMI plan where EMI payments increase or decrease respectively as the tenure progresses.

Car loans do not come with any tax sops. Therefore, one must look at repaying the loan quickly. If the buyer make windfall gains or get a large bonus he can utilize the money to make prepayment on car loan.

The buyer can leverage existing relationship with his lender to get a concession on the interest rate on the car loan.

Compare the used car loan interest rates with a personal loan rate. If the rates are more or less the same, the buyer can opt for a personal loan to fund the purchase of the car, since there is no need to place any security with the lender that way.
Keep in mind the car model before going for shopping for a loan. Financiers are comfortable while lending for cars that come with a reasonable resale value and higher demand.

As car showrooms get flooded with newer models, the replacement period of an automobile has come down considerably, which in turn implies that secondhand cars generally come in better shape than they used to. Besides, with a host of financing options available, even the Ford, Chevrolet or for that matter, the Mercedes needn’t be beyond one’s reach anymore.