Used Car Loans: Everything You Must Know

“Do I take out a loan on a new car or a pre-owned one?” 

“Should I just cough up the cash and sidestep the loan route entirely?”

“How do I go about applying for a loan?”

In buying a car, the decisions involved extend well beyond the make and model, the looks or even the mileage or performance.

Car Loans or Financing is a key part of the car buying story, and the questions about car loans often do not have easy answers. So we spoke to some car financing experts who helped us address the most common doubts, questions and myths that surround used car loans. 

Used Car Loan vs. New Car Loan: What’s better for you?

Let’s start with the biggest concern around pre-owned cars: their presumably high rate of interest versus a new car loan. The question you must ask is, “Will this higher rate of interest really burn a hole in your pocket?” 

The interest rate on used car loans typically starts at 13% and could go up to 18.5% depending upon your profile and the age or segment of the car. If you’ve maintained a good credit score, the interest rate for you will most likely be on the lower end of this spectrum. Interest rates on new car loans, on the other hand, range from approximately 8.5% to 15.5%, subject to your profile and credit score, just like any other loan.

These rates, however, can vary from lender to lender. While people often choose to avail a loan directly from banks and NBFCs, OEMs and used car dealers are now aggressively leveraging their partnerships to offer customers tailored finance solutions that cater to their varying needs. 

Now, let’s get straight to the math to bring out the difference between used car loans and new car loans, with two simple examples.

New Honda City vs. Used Honda City: Save more on a used car, as good as new

Let’s say you have your eye on the new Honda City ZX MT, available in your city for Rs 16 lakh (on-road price), but you have a budget constraint. The same car driven just 12,000kms in the pre-owned car market comes at Rs 12 lakh, and hits the sweet spot in your budget. Would you call that a steal? Or would you get cold feet when you’re offered a loan on the used car at a 13% interest?

Let’s compare that to an 8.5% interest on the new Honda City, and find out whether the difference is worth fretting about. (Note: Not everyone gets a new car loan at a rate of interest as low as 8.5%: like any other loan, it largely depends on your credit profile and income.) 

To keep the math simple, assume you’re being offered a loan of Rs 10 lakh for a tenure of four years in both cases:

With this simple calculation, we’ve uncovered that the difference in interest paid towards a principal of Rs 10 lakh for a new and used Honda City, is just  Rs 1.04 lakh over a period of four years. 

And while the difference in your monthly EMI instalment is just Rs 2179, you stand to save a total of Rs 4.10 lakh (difference in total cost + additional interest earned on down payment saved) on the used Honda City that is as good as new.

When you look at the numbers, the seemingly higher rate of interest on used cars doesn’t look like a deal breaker, especially if you love everything else about the pre-owned car, does it? Still not convinced? Let’s dive into yet another example.

New Hyundai i20 vs. Used Hyundai Verna: A car that fits your budget vs. a car you aspire for

This time, let’s consider a new Hyundai i20 Asta 1.2 MT, that’s available for Rs 9.92 lakh (on-road price) in your city. Perhaps the premium hatchback falls within your budget and is the car you like best in that range. 

On the other hand, you spot a car you aspire to own in the pre-owned car market – a mint condition 2020 Hyundai Verna SX that’s hardly driven 25,000km at just Rs 10.61 lakh. That would be a difference of merely Rs 69,000.

Wouldn’t you be willing to moderately boost your budget if it gets you the car of your dreams?

In that case, let’s look at the difference when it comes to taking a loan, given the higher rate of interest on used car loans.

We’ll assume your car loan gets approved for 80% of the cost of both the new i20 and the pre-owned Verna, this time for a tenure of three years, at an interest rate of 8.5% and 13% for a new and used car, respectively:

What do you see here? For a mere difference of Rs 3,547 in monthly loan EMI, and for just Rs 1.41 lakh more in the total cost over three years, you can own a great quality used sedan instead of a new Hyundai hatchback, if that’s the car you aspire to own. 

You could visit any online loan calculator, punch in the numbers for new and pre-owned cars of your choice, and see the difference for yourself. 

Cash vs. Used Car Loan: Is it Better to Pay Cash or Finance a Pre-Owned Car?

Let’s move on to another common dilemma car buyers face. You’re all set to close the deal on that gleaming Renault Kwid you got for a great bargain in the used car market. Driven barely 5000km, and costing you just Rs 4.24 lakh, you think you’re ready to pay for it in cash. But hold on, you might want to take a pause there and give a thought to what I’m going to share next.

Paying in cash could seem like the sweeter deal, and moreover means you’re free from monthly EMIs for the next two to three years. On the contrary, you’ll be emptying your savings account of quite a significant sum of your hard-earned money.

Suppose your bank offers you a used car loan of Rs 4 lakh at a 13% rate of interest for three years, you’d probably be inclined to think you’ll end up paying a considerable sum in interest. But let’s consider the money you have in hand. If you choose to finance your car, you can invest this cash in a fixed deposit (FD) at, say, a 6.5% interest rate for three years. (While an FD is a conservative instrument, there are various instruments that can give you even higher returns.)

Let me break it down visually for you.

You see, the math speaks loud and clear for itself. By investing Rs 4 lakh in a financial instrument (read FD @6.5% p.a. for 4 years) rather than spend it upfront on your car, you make a gain of Rs 1,14,587 in returns, by the end of the investment tenure. At the same time, you’d be a proud owner of the French-made hatchback, having shelled out just Rs 1,15,088 in interest, at the rate of 13% on your loan amount.

The returns on the fixed deposit not only covers the interest paid towards your loan but also helps you set aside cash for a possible time of need. Thus, we see how financing your vehicle offers you the benefit of paying gradually over time, while you earn more from the cash you have in hand. Moreover, you stand to build up your credit score when you routinely and diligently make your monthly loan payments.

In a recent conversation with Spinny, Rishi Kant Mishra, Business Head – Vehicle Loans, IDFC First Bank Limited, explained in very simple terms how a used car loan is beneficial to many. He said, “Pre-owned car loans allow the customer to spread out the cost of the vehicle over a longer period of time. With banks like ours offering loans up to 100% of the value of the car, the customer is relieved of the hassle of accumulating down-payment and can keep their savings intact. For customers availing a loan for the first time, a pre-owned car loan provides a great opportunity to build a healthy credit score by making timely EMI repayments, which significantly enhances their credibility for a future sanction on their home, business or a personal loan.”

How to Apply for a Used Car Loan in India

We now come to the most important aspect of used car loans – how do you apply for one? You may be well informed of the advantages of taking a used car loan by now but let’s look at how you can go about applying for one (assuming you’ve zeroed in on your budget and set your heart on a used car you wish to own): from checking your eligibility to completing your documentation and ensuring quick and efficient disbursals.

 

Used Car Loan Eligibility

With the used car market in India booming in recent times, it has become easier to get used car loans from banks and NBFCs. The first thing lending institutions would look at, however, is your eligibility.  

If you are a salaried or self-employed individual between the age of 21 and 65 years, with a steady income and minimum payment capacity, you’re eligible for a pre-owned car loan. However, it is good hygiene to check your eligibility yourself before you formally apply for a used car loan, as it saves you from any unwanted hassle or lost time.  

Here’s a quick overview of the boxes you’ll need to tick to confirm your loan eligibility:

Credit Score and How It Affects Used Car Loan Eligibility

Once the general age and employment criteria checks out for you, the next thing that will be up for consideration is your credit score. Availing any kind of financing for that matter depends largely on your credit score. A credit score simply tracks your past loan exposure and  repayment patterns to reflect your credit worthiness.

If you’re someone who pays your credit card bills on time, and has never skipped an EMI instalment, chances are you’ll have a pretty good credit score, and with it, the power to negotiate the terms on your loan, the principal amount, and its rate of interest, with your finance partner.

On the other hand, a low credit score could translate to a loan rejection, higher interest rates, and generally stricter terms on your loan.

Co-Applicants and How They Help Increase Your Used Car Loan Eligibility

If your income is inadequate, or you’re falling short on your credit score, or perhaps, if you wish to increase the limit on your loan, you could consider adding a co-applicant.  People who you share a blood relation with can easily become co-applicants given they meet the eligibility criteria of age, income, and credit scores. If both borrowers have a good credit history, it could make your application more attractive, fetch you better interest rates and facilitate a speedy disbursal of your loan.

It is however not a good idea to add a co-applicant if their credit score is lower than yours or if they have a high loan exposure. In such a case, the application is likely to be rejected, even if you are eligible for it as a primary applicant.

Other Ways to Improve Your Used Car Loan Eligibility

Here are some other ways to improve your eligibility for a used car loan:

• Let your financier know if you have any other sources of income apart from your regular salary or business income. For example, income from rent, agricultural income or income from investments.
• Consider pre-paying small personal loans/ other loans taken for consumer durables, or clear your outstanding balance on your credit card. These are short term debts but add up to your obligations and reduce your eligibility.
• In the absence of adequate income proofs, financiers also consider your average bank balance to determine your eligibility. Other than your primary account, consider submitting statements of alternate accounts where you transact.
• Opt for a step-up loan repayment structure where your monthly instalments increase annually in tandem with increase in your income.

Documents Required for a Used Car Loan

Finally, keep all necessary documents ready, to speed up the approval on your loan. These requirements will vary depending upon whether you are a salaried or self-employed individual, and can differ from institution to institution. Nonetheless, here’s a quick list you can refer to:

Apply For a Used Car Loan Knowing You’ve Got the Basics Right

Now that you’ve ticked all the boxes on your used car loan research, you can comfortably apply for one. Most authorised used car dealers today ensure you get the best deals when it comes to financing your pre-owned car, by maintaining a trusted network of banks and NBFCs empanelled with them. Moreover, depending upon your relationship with your dealer, they’d be more than happy to put in a word for you.

In a recent interview, Amit Kakkar, Chief Executive Officer, Financial Services at Spinny said, “At Spinny, we have tie-ups with all leading banks and NBFCs, and are rapidly scaling up our associations, keeping in mind the finance needs of all our customers. We recently partnered with NBFCs such as Mahindra Finance, Poonawalla Finance, Bajaj Finance and Piramal Finance whose risk appetite is different from banks. They are more open to taking a call on our customers and sanctioning loans.”

With digitization at the helm of all businesses and industries today, applying for a loan is merely a click away. All you need to do is duly fill in the online application form, make sure that the information and documents uploaded are accurate and wait for your finance partner to approve your loan.  

Benefits of a Used Car Loan

A car, be it a new or pre-owned one, does cost a pretty penny and shelling out a lump sum of your life’s savings to own one is certainly not a wise financial choice, as we’ve established earlier on. A used car loan comes in handy and can provide a multitude of benefits, some of which are:

Conclusion

Owning a car today is no longer a luxury but a necessity. With more and more people gravitating towards personal mobility, the demand for cars has soared giving a fillip to the used car industry as well. People don’t just opt for pre-owned cars because of the affordability it allows anymore but for various other reasons including but not limited to: 

• The emergence of organised used car platforms who ensure the experience and perks that come with buying a pre-owned car are nothing short of a new car experience.
• Reduced ownership periods.
• Long waiting periods on new cars.
• The changing perception and global acceptance of used car ownership

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FAQs on Used Car Loans

What is the interest rate on a new and used car loan?

The interest rates on new car loans range from approximately 8.5% to 15.5%, subject to your profile and credit score, while the interest rates on used car loans typically start at 13% and go up to 18.5% depending on your profile and the age or segment of the car. At Spinny, interest rates for our luxury car segment, Spinny Max, start at 11.25%, and at 12.99% for our Spinny Assured cars.

What is the maximum loan tenure for Used Car Loans and New Car loans?

Used car loans generally come with a maximum repayment tenure of 7 years: though most people prefer a shorter loan tenure as it reduces the overall interest outgo, and financial liability. Similarly, the maximum tenure for new car loans is 7 to 8 years.

How do I find out if I’m eligible for a used car loan?

If you are a salaried or self-employed individual between the age of 21 and 65 years, with a steady income and minimum payment capacity, you’re eligible for a pre-owned car loan. However, there are other boxes you’ll need to tick depending on whether you’re a salaried or self-employed individual, or for that matter a non-individual entity. These days there are various tools that you can use to check your eligibility yourself before applying for one. For example, Spinny lets you check your used car loan eligibility in minutes, just by answering a few simple questions.

Is it better to apply for a used car loan with a co-applicant?

You could consider adding a co-applicant if your income doesn’t meet the minimum requirement, or you’re falling short on your credit score, or perhaps, if you wish to increase the limit on your loan. If both borrowers have a good credit history, it could make your application more attractive, fetch you better interest rates and facilitate a speedy disbursal of your loan.

It is however not a good idea to add a co-applicant if their credit score is lower than yours or if they have a high loan exposure. In such cases, the application is likely to be rejected, even if you’re eligible for it as a primary applicant.

How much time does it take for a pre-owned car loan to be approved?

On an average, it can take up to 2-3 days to get a used car loan approved. At Spinny, we also offer same-day approval on loans.

In India is it good to buy a used car with cash or a loan?

In India or any part of the world, it is always advisable to take a loan on a used car instead of paying for it in cash. Taking a used car loan has a host of advantages, from saving cash for a rainy day, reserving your money for a wiser financial investment, building up your credit score, to providing you with flexible car ownership, where resale of the car pays up for your loan outstanding, and much more.