July 12, 2023 •
In India, the used car market has been growing tremendously. According to a report by Statista, it would increase to 8.5 million units in 2027 from 4.4 units in 2020. This can be attributed to automobile companies rolling out new models and the increasing number of young people joining the workforce. In case you were concerned about how to finance the purchase of a used car. But which one is better for you? Personal Loan vs Used Car Loan. Read on to know more
Understanding of Personal Loan & Used Car Loan
Let us understand, what is a Pre-owned Car Loan and Personal Loan are
- Personal Loan: It is a type of loan that can be used to fund various financial requirements such as weddings, emergency expenses, higher education, etc. Personal Loans are unsecured in nature, meaning you do not have to provide collateral as security to get the borrowed amount. They come with a fixed interest rate and specific terms for repaying the borrowed money. The loan amount, interest rate, and duration of repayment are determined based on factors like the borrower's credit history, income, and overall financial situation. Monthly payments are made to gradually pay off the loan over an agreed-upon period.
- Used Car Loan: A Used Car Loan or Pre-Owned Car Loan is a type of loan offered by financial institutions for individuals who aspire to buy a used car. Factors such as the usage, condition, and market value are considered before the disbursal of the amount to the borrower. The lender will also check the type of used car you intend to purchase, bank balance, and your current income. A plan will be made consisting of the interest charges, EMIs, etc, and if you agree to the lender’s terms, your responsibility is to repay the loan on time.
Major Elements that Need to Be Considered While Choosing Personal Loan and Used Car Loan
- Rate of Interest: The interest rate determines how much money you will need to repay each month. If you have a good income, a low debt-to-income ratio, a high credit score, and stable employment, you should be able to secure a Personal Loan or a Used Car Loan at attractive interest rates.
- Loan Amount: When obtaining a used car loan, the lender will typically require you to provide a down payment. The specific amount will depend on factors like your credit history and the condition of the vehicle, but it is typically 10% of the car’s current market value. The lender will then cover the remaining balance. On the other hand, with a Personal Loan, you generally do not need to make a down payment. If you have a good credit history and a decent income, you can receive the full loan amount you applied for. For luxury cars, you may consider applying for a Pre-owned Car Loan as the loan amounts offered are higher than that of Personal Loans.
- Loan Tenure: Whether you take a Personal Loan or a used car loan, make sure that the lender offers flexible loan tenures. This will enable you to plan your finances better and help you stay on track with your monthly instalments. Fortunately, both types of loans offer flexible repayment tenures. In the case of a Personal Loan, lenders offer repayment tenures of up to 5 years while Used Car Loans can be as high as 6 years.
- Fee and Charges: There are a few miscellaneous charges that must be pay. It is necessary to ask your lender to be transparent about these charges so that the borrowed amount does not become burdensome. Personal Loans generally do not have any prepayment charges if paid from your own sources. The same goes for used car loans too, but a prepayment amount may be charged if the loan is paid via outside sources. Similarly, check for processing fees, late payments, and cheque bounce charges.
- Credit Score: Before applying for any type of loan, it is important to review your credit score. Personal loans heavily rely on your credit rating as there is no collateral involved. You may face higher interest rates than usual if you have a low credit score. Ideally, for a Personal Loan, it is recommended to have a credit score of over 750. Although the car is hypothecated in the case of a used car loan, it is good to have a credit score that is high as you will be able to negotiate better interest rates, loan terms, repayment tenures, etc.
- Application Process: Many lenders have taken their operations online, meaning that you can apply for a Personal Loan or Used Car Loan from the comfort of your home. If you meet the eligibility criteria, you just must fill out an online form, scan your documents, and click ‘submit’. Post that, your loan should get approved quickly, provided everything is in order.
While debating the merits of a Used Car Loan vs Personal Loan, it is important to evaluate your specific circumstances and financial goals. A Personal Loan offers versatility, allowing you to use the funds for various purposes beyond just purchasing a car. On the other hand, a Used Car Loan is specifically tailored for financing a Pre-Owned Car, often offering specialised terms and lower interest rates. To make the right decision, carefully assess factors such as interest rates, repayment terms, and eligibility requirements. Consider your overall financial situation, credit history, and the purpose for which you require the loan.
Frequently Asked Questions
- Is it better to buy a second-hand car on loan?
Yes, there are many reasons why you should buy a used car on loan, especially a Pre-Owned Car Loan. For starters, certain lenders will even provide up to 100% of the car’s value in funding, meaning that there is a chance for you to save more. Also, Used Car Loans come with low interest rates, flexible repayment tenures, and hassle-free loan approvals, thus making them an attractive option.
- Should I take a Personal Loan to buy a used car?
One can take a Pre-owned Car Loan in case your credit score is relatively low. You can also take a Personal Loan to buy a pre-owned car, this type of loan usually comes with higher interest rates than used cars loans.
- What are the benefits of a used car loan?
Competitive interest rates, flexible repayment tenures, and high borrowing amounts are some of the many benefits you will get from availing of a used car loan.