In today’s world, cars are no longer considered to be a symbol of luxury. It has now become an indispensable part of our modern lifestyle, as it ensures easy mobility, utility and comfort. Ever since the COVID-19 pandemic, people have strayed away from public transportation and opted more for personal transportation such as cars to maintain social distancing and hygiene.
However, not everyone in India can afford to buy a new car with ease. The prevailing economic recession due to the pandemic has meant that people have strayed away from making such expensive purchases. Due to this reason, the used car market in India has grown in abundance. Nowadays, there are even reliable dealerships that sell pre-owned cars maintained in good condition and at an affordable price. So, we take a deeper dive into some things you need to keep in mind when you apply for a used car loan.
9. Understand The Used Car Loan Process
The used car loan process involves several steps, so it is necessary to be well-informed in order to get the right deal. The steps include assessing your financial situation, checking your credit report, setting a budget, researching lenders, getting pre-approved, finding the right car, negotiating the price and taking delivery of your vehicle. By understanding and following each of these steps, you can navigate the loan process effectively and secure financing for your used car purchase.
ALSO READ: How to Apply for a Car Loan
Before you apply for a used car loan, it is advisable to research and understand how the process works in detail. Securing a used car loan is more or less similar to a new car loan, but with a few key differences involved. For instance, interest rates on the former may turn out to be higher than the latter and the terms and conditions of the loan may also vary. Take the time to look up various loans and compare options from different lenders to find out the best deal for yourself.
8. Check Your Credit Score
Your credit score is key in determining whether you are eligible for a used car loan and what interest rate you are likely to get. Before applying for a loan, check your credit score and ensure it is in good shape, ideally over 750. A good score can help you qualify for better loan terms and lower interest rates. Pay all your due bills on time in order to maintain a healthy score and avoid unwanted fees and penalties.
Reviewing your credit report allows you to identify any errors or discrepancies that could negatively impact your credit score. Additionally, understanding your credit score helps you assess your creditworthiness and provides insight on the type of loan you may qualify for eventually. By checking your credit score before applying for a used car loan, you can take steps to improve your credit if necessary and increase your chances of securing favourable financing terms.
7. Understand The Valuation of the Car
You must understand the valuation of their cars before applying for pre-owned car loans. This will prevent you from overpaying for your car. Lenders will consider several factors when evaluating the value of a pre-owned car.
In general, older cars with higher mileage tend to have lower values compared to newer cars with lower mileage. Mileage directly affects a car’s wear and tear and its remaining lifespan, which impacts its resale value. The overall condition of the car, including its exterior, interior, mechanical components, and maintenance history, significantly influences its value. A well-maintained car with no visible damage or mechanical issues typically commands a higher price. So, keep these factors in mind when you are assessing your next purchase.
6. Know The Right Loan Amount
You should be very clear about the loan amount that you need to borrow. The higher the loan amount, the higher would be the monthly EMIs. Hence, the aim should be to opt for a lesser loan amount. That being said, you should ensure that the loan amount isn’t too low, as this could increase unnecessary financial burden on you.
Start by considering your budget and financial situation. Assess how much you can comfortably afford to repay each month without straining your finances. Next, research the market value of the specific make and model of the used car you are interested in. Websites specialising in car valuation can provide estimates based on factors such as mileage, condition, and age of the vehicle. Consulting with a financial advisor or loan officer can also provide valuable insights tailored to your specific financial circumstances and goals.
5. Take Care of the Down Payment
Making a down payment when purchasing a used car can be a wise financial decision. By paying a sum upfront, you reduce the total amount you need to borrow, which can lead to lower monthly payments and potentially save you money on interest over the life of the loan. Typically, a down payment of 10-20% of the used car’s price is recommended, but the more you can afford to put down, the better.
Lenders usually sanction pre-used car loans of up to 80-90% of the car’s market value. The remaining amount has to be paid by the borrower as a down payment. By increasing the down payment amount, borrowers can reduce their EMI’s. Greater down payments can also help in securing used car loans at lower interest rates. These factors can help you significantly reduce your monthly financial obligation.
4. Opt for a Shorter Tenure
Although opting for a shorter tenure can result in slightly higher EMIs, it can help you in the long run. When you choose to take a shorter loan tenure, the total interest you have to pay gets reduced significantly. The lender will also charge a lower interest rate in such cases. Hence, the overall liability of the borrower decreases. However, you need to ensure that resulting EMIs are well within your financial capabilities. It is crucial to strike a balance between tenure and EMIs.
Additionally, a shorter tenure means you will be debt-free sooner, providing you with financial freedom and flexibility. You will also build equity in your car faster, which can be beneficial in case you decide to sell or trade in before the loan is fully repaid. However, you should make sure that higher monthly payments at a shorter loan term fit comfortably within your budget. Before committing to a shorter tenure, carefully evaluate your financial situation and consider factors such as your income, expenses, and other financial goals.
3. Look at the Interest Rate
Used car loan interest rates may vary from lender to lender. They usually range between 14 and 20 percent per annum on a reducing interest basis. Factors such as age, type, and make of the car also matter while determining the interest rate. Before you get to sign the loan disbursal form, make sure you confirm the interest rate with the lender. There is no point paying extra interest if you are not getting any benefits.
If the interest rates are high for a shorter tenure, the overall amount you pay for the car will be low. It is vital to check the EMI before you opt for the repayment tenure. If you increase your down payment, lenders will offer loans at lower interest rates.
2. Compare Various Lenders
Choosing the right lender is a crucial step in the process. You must compare pre-used car loan products from various lenders before finalizing with one. Many online tools can help you compare various lenders in the market and help you come to a decision. Do not go for a lender who is offering the lowest interest rate. Instead, you should look at the overall features and benefits that you will end up getting.
Many loan providers have special schemes at the time of festivals, where you will get a good discount on your interest rate. Also, you must compare the lenders to see whether you are eligible to get an auto loan. There are many criteria where loans are denied due to low credit score, annual income etc.
1. Keep All Documents In Hand
Lenders would ask for some basic documents for providing pre-owned car loans. These may include documents such as your PAN card, Aadhaar card or voter-ID card, bank statements, salary slips, car registration certificate, and insurance copy. You must keep these documents ready before applying for a used car loan.
Inability to present these documents on time may lead to the rejection of the loan application. You need to make sure you are equipped with the right set of documents, so that the whole process can be streamlined, and you can secure a loan that will suit your needs and budget.
Summary
A used car loan can be a convenient way to finance the purchase of a pre-owned car. However, before applying for the loan, you must ensure that you understand the used car loan application process. The availability of pre-owned car loans has ensured that anyone can fulfil their dream of owning a car.
It is important to compare loan products from different lenders and choose the best suited used car loan. If you follow the steps mentioned in the process of applying for a used car loan, you will ensure to get the best deal under the right financial circumstances, and you can purchase the car of your dreams.
FAQs About 9 Things To Keep In Mind When Applying For A Used Car Loan
Is the loan amount in line with the budget?
The first step is to evaluate your financial situation thoroughly. Analysing your income, expenses and existing financial commitments will give a clearer picture of the EMI limit of your budget. Ensure that the loan amount fits comfortably within your financial capacity.
What is the interest rate applicable on the used car loan?
The interest rate plays a pivotal factor that shapes the overall cost of your pre-owned car loan. Different lenders offer varying interest rates, and even a seemingly small difference can translate to a significant difference over the loan’s tenure.
What is the overall cost of the loan?
While the initial purchase price of the pre-owned car is essential, it is equally crucial to factor in other costs. These might include processing fees, documentation charges, valuation charges and a lot more.
Which loan tenure should be chosen?
The loan tenure can play a significant role in determining your monthly instalments. A longer tenure might result in lower monthly payments but result in higher overall interest paid. A shorter tenure however could mean higher monthly payments but overall lower interest.
