People generally prefer buying a pre-owned car for two reasons. Either they have budgetary constraints or they want to use a pre-owned vehicle to perfect their driving skills before purchasing a new car. The first credit option that comes to the mind of a used car buyer would be a Used Car Loan.
Used Car Loans have some major differences from car loans offered for purchasing new cars. Unlike a new car loan, the final loan amount for Used Car Loans depends on the age, model and condition of the vehicle. The interest rates of Used Car Loans are usually higher than new car loans. For some credit profiles, the pre-owned car loan interest rates can be almost similar or even higher than Personal Loan interest rates offered to the same applicant. This is why consumers should also compare the Personal Loan offers available on their profile for financing their used car purchase.
Here is a comparison of features of Personal Loans and Used Car Loans:
Interest rates of Personal Loans usually start from around 10.25% p.a. onwards. Some public sector banks offer personal loans at lower interest rates. However, the final personal loan interest rates offered to an applicant would largely depend on his/her credit score, monthly income, occupation profile, employer’s profile (if employed), etc.
The interest rates of Used Car Loans usually start from around 10% p.a. with some PSU banks offering lower interest rates. However, the final interest rate offered would depend on the car’s model and age in addition to the applicant’s credit profile. Hence, a prospective used car buyer having a good credit score and satisfying the income, occupation profile and other Personal Loan eligibility criterion set by the lender have high chances of availing Personal Loan at same or lower interest rates than Used Car Loans.
|Lending institution||Interest Rates (p.a.)|
|Used Car Loan||Personal Loan|
|SBI||9.75% – 13.25%||10.00% -13.75%|
|Axis Bank||13.20% – 16.35%||10.25% onwards|
|HDFC Bank||13.75% – 16.00%||11.00% onwards|
|ICICI Bank||11.00% – 15.50%||10.50% onwards|
|PNB||8.65% – 9.60%||8.80% – 15.35%|
|Bank of Baroda||10.20% – 12.95%||9.20% – 16.55%|
|IndusInd Bank||10.00% – 21.00%||10.49% onwards|
|Union Bank of India||9.80% – 11.40%||9.80% – 13.90%|
Lenders generally provide LTV ratios of up to 80% for pre-owned car loans. Some lenders claim to offer higher LTV ratios for the Used Car Loan. LTV ratio is the proportion of a car’s value financed through the Used Car Loan. The rest of the component has to be financed by the buyer from his/her own sources in the form of down payment.
However, the LTV ratio would not depend on the purchase price arrived between the car buyer and seller. Instead, the LTV ratio would depend on the value of the car arrived at by the lender after factoring in the age and model of the used car. This increases the possibility of arriving at lower values for pre-owned vehicles than the purchase price paid by the car buyer and thus, can result in lower amounts.
For example, if the purchase price of a pre-owned car is Rs. 4 Lakhs and the lender arrives at a value of Rs. 3 Lakhs on using its valuation process, your loan amount would be Rs 2.4 Lakhs, assuming an LTV ratio of 80% for Rs. 3 Lakhs value. The rest of your purchase price, i.e. Rs. 1.6 Lakhs, has to be paid from your own pocket. However, if you go for a Personal Loan, you can take a loan of up to Rs. 4 Lakhs, depending on your monthly income and repayment capacity. Thus, you can use the entire proceeds to pay for your car purchase without burdening your finances.
The loan tenure for a Used Car Loan usually goes up to 5 years, with some lenders offering up to 10 years for repayment of the entire loan. However, the final tenure may also depend on other factors like the age and condition of the used car. For example, a lender offering a Used Car Loan requires you to repay the loan within 10 years of your vehicle’s original purchase date, subject to a maximum loan tenure of 5 years. Therefore, if you buy a 7-year-old car, you will have to repay the loan within 3 years.
In case of Personal Loan, lenders usually offer tenures of up to 5 years, with some lenders offering tenures of up to 7 years. Thus, if you avail a Personal Loan for financing a pre-owned car purchase, you can opt for loan tenure based on your repayment capacity, irrespective of the age and condition of your used car.
Although Personal Loans may seem like a better option than pre-owned car loans for a used car on several parameters, Used Car Loans may outscore Personal Loans for loan applicants having a poor credit score. As Personal Loans are not backed by any security, lenders put higher emphasis on the credit scores of the loan applicants. Applicants having low credit scores, usually credit scores of less than 750, are charged higher interest rates for Personal Loans.
As Used Car Loans are secured loans, applicants having low credit scores have higher chances of getting their loan approved and at lower interest rates than Personal Loans.
Loan Approval Process
Being an unsecured loan, the loan approval process for Personal Loans is quicker and less cumbersome than Used Car Loans. The loan processing can become more complicated if you buy a used car from an unorganized player in the pre-owned car segment.