There are quite a lot of criteria that need to be considered before opting for a used car loan. Previously, it was quite a task to avail a used car loan but now the industry has grown quite a bit and technology has made it even easier. So, availing a used car loan is not difficult at all. In fact, higher variant used car loans are very easy to avail and there are quite a few schemes that are available for the same as well.
Car is a product everyone uses on a daily basis. From the average middle class family to higher class everyone has a car. Very few people buy a car with a down payment. Most people opt for a loan simply because a car loan being a secured one has a lower rate of interest and easier to avail. Hence, most people opt for a loan while buying a car.
Used Car Industry
Easy availability of finance and increasing income level of the middle class has made used car loans very popular. The new car industry has been booming and so is the used car industry. The used car industry is also very strong in India. Pre-used cars are used mainly for commercial purposes and primarily bought in semi-urban or rural areas where budget becomes a constraint. Thus, the second hand car industry in India is also flourishing!
If a person opts for a loan while buying a second hand car, he needs to avail a Used Car Loan. This is definitely different from a new car loan, but not starkly different as they both refer to car loans, which are basically secured in nature.
Things to consider in a Used Car Loan
New car loans and used car loans are somewhat different in nature. Some basic differences are:
- Rate of Interest: The interest charged for used car loans is higher than that of new car loans by about 3%-4%. The rate of interest for a new car loan ranges from 11%-14% whereas that of a used car loan ranges from 14%-16%.
- Percentage of loan sanctioned: The percentage of loan for used cars is lesser than that of new cars. However, it depends on how old the car is, the make and the model, the kilometres it has run, the general condition of the car, etc. It usually ranges from 60%-75%.
For example: If the on road price of a 2011 make Toyota Etios is Rs 3.25 lakhs, you might get a 75% loan of the total amount whereas for a 2007 make Wagon R, you might get only 70%. So, it depends a lot on the year of manufacture as well.
The bank usually asks you to submit the documents of the car before sanctioning the loan. Sometimes, the bank representative might come to have an inspection of the car before sanctioning the loan so as to do a physical verification and check the car’s condition. The check is done by the bank only as a one-of case and is not mandatory. It is usually done for cars that are more than 4 years old. The bank provides a used car loan for a maximum 7 year old car and not beyond.
- The model of the car also plays a vital role. Sometimes the car manufacturer may stop production of a certain model if there is any defect or technical snag in the model. In such cases, the bank might not be willing to provide loan on such a car model as the risk involved with the car is very high. If the car breaks down, there could be a scarcity of the availability of spare parts.
Another aspect the bank considers while disbursing a used car loan is the previous EMI and CIBIL score of the person on whose name the loan is being taken. For example, if you already have a big loan amount like house loan, another car loan, etc. and you are paying your EMI on time, then you would have a good CIBIL score for your credit rating. In that case, availing your used car loan becomes quite simple. However, the case might be different for someone who’s CIBIL score is not good.
CIBIL stands for Credit Information Bureau India Limited. They maintain records of individual’s payment pertaining to loan and credit card payments. They calculate the score based on this payments. It ranges 300-900.
- Your income would also be considered at the time of disbursing your used car loan and your disposable income as well as employment history, number of dependants, etc. Employee Benefit: Sometimes, the bank employee might be able to avail a used car loan at a better rate than others. Modified Car: Never buy a modified car! Cars are usually “modified” only by car enthusiasts and racers! Since the modifications have been done ex-showroom, there is no control on the quality of the modification. Hence, modified used cars are usually not financed.
- Warranties and Car Service History: Some dealers provide warranties on their cars. So, as a buyer you must avail as must warranty as possible. Also, check the car’s service history which preferably should be from a recognised service station. The more the car is serviced, the better will be its performance!
- Very Lightly used car: If the car hasn’t been used at all, then it might not be a good buy. A very lightly used car is not expected to give its best performance and battery, engine, etc. might not work to its optimum!
- Car Documents: You need to check that the car’s documents are in place before finalizing your car like:
- RTO tax receipt: You need to collect the original tax receipt from the Regional Tax Office. This is now a one-time affair and ideally the owner should have paid it. However, you need to get the original RTO tax receipt for your own records so that later you might produce it if necessary.
- Original Car Registration Certificate: You need to check and confirm the state of registration of the car and it matches with the number place and all details have been mentioned correctly.
- Insurance Policy: When you are purchasing a policy, there should be an insurance policy covering the same at least a third party one. However, once you transfer the vehicle to your name, you need to change the insurance policy as well for the continuation of the coverage so that you do not have any difficulty to claim.
- Original invoice of the car: Although the owner might provide you with an invoice for resale of the car, it makes a lot of sense to take a look at the original invoice of the car and check all details like the chassis and engine numbers which can be verified with the vehicle.
- Finance NOC: If you are buying a car which has already been on finance from the previous owner, then you must avail a No Objection Certificate or a NOC for your car. It makes sense to cross verify with the original finance company on the authenticity of the NOC even if you are looking to transfer the balance to a different company.
How to find the right used car loan?
There are quite a lot of used car loan aggregators which provide all information about the same. The rate of interests offered by each bank, the paperwork required, the documentation, etc. is provided by all the online car loan aggregators. However, as a customer and an end-user, you must consider the following before you opt for your loan:
- Which bank has the lowest interest rate for a used car?
- Which bank has minimum processing fees and other charges?
- Which bank has lowest late payment penalty, in case you miss your EMI in a certain month?
- For a car loan it is very important to know the following as well:
- Is there any pre-closure or pre-payment charges?
Is the rate of interest fixed for the entire tenure, floating and changes according to market scenario or diminishing? Floating rates will give variable interest rate. Fixed rate is advised for people who doesn’t want volatility in their EMI amount.
All these factors need to be considered before opting for your used car loan. How to apply for used car loan?
- Firstly you need to find a car of your choice and budget. Only then you can avail a loan for the same. You cannot apply for a loan unless the car is finalized. So, the first step for availing finance options for your used car is to finalize your car!
- When you are finalizing your car, please ensure that the car is not more than 5 years old as financing a very old car is difficult and is sometimes rejected as well.
- When you buy your used car, make sure you do the same from a registered car dealer. Getting your loan becomes much easier and faster when you buy your used car from a registered and a reputed used car dealer! In that case you can also get attractive offers and deals as well as better rates.
- Once the car and dealer is chosen, you need to figure out your budget, i.e. the exact finance that you need. Say your car is Rs 4 lakhs and you have Rs 1.5 lakhs of cash. Then you have a requirement of only 62.5% of the entire value. If you opt for a lower percentage of loan, chances of getting a better rate is higher! Thus, you do not need to bargain for an 80% car loan in such cases.
- Compare: There are loads of online aggregators, banks, etc, who offer loan. You need to weigh the pros and cons and then opt for a loan which best suits your needs. Interest rates is definitely one of the important factors that you need to consider but it is not the ONLY factor. You can also negotiate to get a better deal!
- Documentation and paperwork:
Getting your documents ready is also an important step. Your basic information of the income proof, assets, identity proof, address proof etc. are required.
There are certain mandatory documents which are needed and your vehicle is hypothecated to the bank as long as you continue the loan. It simply means, that if you default, the bank may choose to sell your vehicle to recover their loan!
- They are income verification proof. This will give the bank a surety that you will pay them their dues. You can submit your bank statements, pay slips, etc. to prove it. If you are self-employed, then bank statements will show how much money you make.
- Asset proof. This is determination of how much your net worth is. This gives you high financial points. Also this gives surety of repayment of their money. They can use your assets to recover the money, in case you don’t repay the loan. Full documentation is required here. It is used as collateral. In case of used car loans, your car is their surety and is used as a collateral and hence a used car loan is a secured loan.
Liens and Liabilities check. This is done to know if you have not paid any of previous loans. A credit report provides this.
India’s pre-owned car industry is expected to boom and hit the 7 million units mark by the year 2020. It is growing almost at par with the new car industry. By 2020 India is expected to become one of the largest used-car industries globally. A recent survey done by Mahindra First Choice Wheels' franchise network mentions that about 45% of the entire used car industry are in metros while more than 50%, i.e. about 55% of the same are in non-metro semi-urban and rural areas. In fact, the non-metro used car industry is growing at a much faster pace than in the metro cities. So, it is evident that if the used car industry in the non-metro area grows at a stupendous pace, the used car loan industry will also flourish!