Things to Consider for Used car loan

8 Things to Keep in Mind While Opting for a Pre-Owned Car Loan

Gone are the days when cars used to be the symbol of luxury. A car has now become an indispensable part of the modern lifestyle, ensuring easier mobility, safety, and comfort. Moreover, having a car has become crucial for several other reasons after the COVID-19 pandemic. It allows people to avoid public transportation and travel safely while maintaining social distancing norms.

However, not everyone in India can afford to buy a new car. Despite the demand for personal transportation at an all-time high, the prevailing economic recession due to the pandemic has prevented many buyers from making such expensive purchases. This has led to the growth of the pre-used car market in India.

What is a pre-used car?

A pre-used or second-hand car is essentially a car that someone has already used before a new owner buys it and re-uses it. A pre-used car is much cheaper than a new car of the same make and model. It’s because a car, being an electrical/mechanical product, suffers depreciation in its value through gradual wear and tear over the years.

Generally, the value of a new car decreases by around 10% every year. It means that a five-year-old pre-used car – whose invoice value is around Rs. 8 lakhs – can be purchased at approximately 50% of its original price, i.e., Rs. 4 lakhs.

Growth of the pre-used car market in India

After the COVID-19 pandemic, the demand for personal mobility shot up by multiple times in India. And owing to their affordability factor, standard two-wheelers and small hatchback cars were the ones in maximum demand. The first quarter of the financial year 2021-22 saw more than 85% growth in two-wheeler sales and 320% growth in car sales as compared to the same quarter of the last year.

However, not everyone preferred to buy a new car. Reasons behind this can range from affordability to personal preferences. That is why the pre-used car market in India also witnessed exponential growth in the last two years.

As per a study, India's used car market size was more significant than the size of the new car market in 2020. The study also revealed that India's used car sales volume grew by nearly 50% on a YoY basis in December 2020. A CRISIL report also stated that used car sales in India shot up almost 115% during the first lockdown.

As per the estimates, the sales figure for pre-owned cars in India is likely to touch 70 lakhs by 2025-26. Are you aware of all the factors responsible for this boom? Let’s discuss:

1. Huge demand for personal mobility

The COVID-19 pandemic has entirely changed the way people want to commute. The fear of the coronavirus and social distancing norms have meant that most people now want to avoid using public transportation modes, including buses, autos, local trains, and taxis. As a result, there is a huge demand for personal mobility.

And this demand has led to an increased sale of cars and two-wheelers in India. All those who could not afford a new car have gone for the affordable way of owning a car by buying pre-used cars. In addition to this, several people wanted to keep more than one car for various family members and opted to purchase second-hand cars.

2. First-time car buyers

This point is interrelated to the first point. The increasing demand for personal mobility resulted in several people buying their first cars. The second-hand car market received a considerable boost due to these first-time car buyers, who accounted for nearly 50% of all pre-owned cars sold in India.

As per an OLX-CRISIL report, the share of first-time car buyers expanded by about eight to ten per cent during the financial year 2020-21. Many novice drivers also prefer to buy a second-hand car first to sharpen their driving skills before driving a new car.

3. Entry of several organised players in the market

Some five years ago, the pre-owned car market in India consisted only of unorganised players. However, the situation has changed vastly now. Several organised players have entered the Indian used car market in recent times. These are mainly certified used-car dealers which sell only good-condition cars.

The entry of such dealers in the market has resulted in the rapid evolution of used car sales in India. People who used to refrain from buying a second-hand car because of the fear that it may start causing problems after a few months are now buyingit with complete peace of mind.

Moreover, many second-hand car dealers also provide warranties against any mechanical issues to their cars in the first 12 months.

4. Changing consumer perception

There was a time when most people wanted to buy new cars only. However, the affordability factor combined with the value-for-money proposition offered by good-condition pre-owned cars has changed consumers' perception. The first-time car buyers and several recurring car buyers are now showing interest in buying second-hand cars.

As per the Government stats, the pre-owned car market in India has grown at a Compound Annual Growth Rate (CAGR) of 11% after the pandemic, making India’s used car market the fifth largest in the world. And going by the current pace, this growth rate figure is expected to touch 15% in the next few years.

5. Growing demand for pre-owned luxury cars

One of the reasons behind the boom in the used car market in India is the growing demand for pre-owned luxury cars. Until a few years ago, owning a luxury car remained only a dream for the common people. Heavy price tags of such cars meant that only elites could afford to buy them.

However, thanks to the growing used car market, owning a luxury car is now possible for people with limited income. Heavy depreciation in the prices of these cars had made them a preferred choice among the used car buyers in India. For instance, one can easily purchase a 10-year-old BMW X3 model at around Rs. 10 lakhs to Rs. 15 lakhs, depending upon the condition. The price of a new car of the same make and model is somewhere around Rs. 60 lakhs.

As per a certified used car dealer, pre-owned luxury cars priced over Rs. 15 lakhs are the most preferred choice among second-hand car buyers in India. The supply of such cars has also jumped by over four times since 2017.

6. Availability of second-hand car loans

This is another major factor behind the growth of the pre-owned car market in India. To help people realise their dream of owning a car, several banks and non-banking financial corporations (NBFCs) in India have started offering used car loans. Some lenders even provide up to 100% financing for the purchase of pre-owned vehicles.

The availability of second-hand car loans has made it easier and even more affordable for people to own a private car in India. Those who are unable to pay the entire amount for buying even a pre-owned car can avail of these loans and spread their payment over convenient tenures.

Things to keep in mind while opting for a pre-used car loan

As mentioned, the availability of pre-used car loans has made it easier for people to fulfil their dream of owning a car. Just like the second-hand car market, the used car finance market has also grown rapidly in the post-pandemic era. With several banks and NBFCs offering used car loans in India, anyone can now avail of easy financing for buying a “new” pre-owned car.

However, there are several things that one should keep in their mind while opting for a pre-used car loan. Let’s have a look at them:

1. Check the credit score

Everyone must check their credit score before applying for a used car loan with a lender. The credit score of borrowers plays an integral role in determining the interest rate and eligibility for any type of loan. By being aware of their credit score, one can take necessary actions to avoid the rejection of their loan application.

Some common factors that can impact a person's credit score include debt repayment history, credit utilisation ratio, average credit age, and the number of active credit accounts.

2. Understand the valuation of the car

The buyers must understand the valuation of their cars before applying for pre-owned car loans. This will prevent them from overpaying for their cars.

Lenders consider several factors evaluating the valuation of a pre-owned car. These may include the age of the car, mileage, and condition of the car’s body, engine, gear, and other mechanical parts. Second-hand car loans are usually disbursed as per this valuation and not the actual price of the car.

3. Know the right loan amount

One should be very clear about the loan amount they 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, the borrower should ensure that the loan amount isn’t too low as well. This could increase the unnecessary financial burden on them.

4. Take care of the down payment

Lenders usually sanction pre-used car loans of up to 80% of the cars’ market value. The remaining amount has to be paid by the borrower as a down payment. By increasing this down payment amount, borrowers can reduce their EMIs.

Greater down payments can also help in securing used car loans at lower interest rates. These factors can significantly reduce the monthly financial burden on buyers.

5. Opt for a shorter tenure

Although opting for a shorter tenure can result in a bit higher EMIs, it can help the borrower in the long run. When one opts for a shorter loan tenure, the total interest they had to pay gets decreased. The lender also charges a lower interest rate in such cases. Hence, the overall liability of the borrower decreases.

However, one should also ensure that resulting EMIs are well within their financial capabilities. It’s crucial to strike a balance between tenure and EMIs.

6. Look at the interest rate

Used car loan interest rates 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 signing the loan disbursal form, one should confirm the interest rate with the lender. There's no point paying extra interest if we aren't getting anything different.

7. Compare various lenders

Choosing the right lender is very crucial. Hence, one must compare pre-used car loan products from various lenders before finalising one. Many online tools can help borrowers in comparing various lenders.

One should not just go with the lender who is offering the lowest interest rate. Instead, one should look at the overall features and benefits one is getting.

8. Keep all documents in order

Lenders ask for some basic documents for providing pre-owned car loans. These may include the borrower’s PAN card, Aadhar card or voter-ID card, bank statements, salary slips, car registration certificate (RC), and insurance copy.
One must keep all 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.

Pre owned car loan

To Conclude

The availability of pre-owned car loans has ensured that anyone can fulfil their dream of owning a car. However, it’s important to compare loan products from different lenders and choose the best-suited used car loan. In case someone doesn’t want to opt for a used car loan, they can try alternative financing avenues, such as personal loans, gold loans, loans against properties, etc. Poonawalla Fincorp provides a gamut of loans to help you fulfil your various dreams. You can take a look at our loan offerings and select a product as per your requirements.

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