Factors affecting on Used Car Loan

5 Things to Know Before Borrowing a Pre-Owned Car Loan

The COVID-19 pandemic has entirely changed the way we commute. The fear of the coronavirus and social distancing norms have forced people to depend less on public transportation modes, including buses, autos, local trains, and taxis. As a result, a high percentage of the population is looking for vehicle ownership.

There was a massive demand for new two-wheelers and cars during the initial part of the pandemic. 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 in India can afford a new bike or car. Though the need for personal transportation is at an all-time high, the economic uncertainty that has been prevailing since the first lockdown has prevented many buyers from making such expensive purchases. This has resulted in the rise of several other concepts which can provide the benefits of car ownership, albeit at lesser costs:

Car leasing

Car leasing is not at all a novel concept. However, in India, it gained popularity only after the COVID-19 pandemic. For some people, making the down payment for buying a new car can be daunting. Such people can opt for car leasing by essentially subscribing to a car for a limited period.

All they need to do for this is pay a flat subscription fee every month and keep the car with them as long as they want. No downpayment, no EMI, no registration and insurance costs, and no annual maintenance charges have to be paid.

Several car manufacturers and financiers offer car leasing services in India.

Shared mobility

The concept of shared mobility has also gained immense popularity in India during the post-pandemic era. Though this concept was introduced much before the pandemic began, people started using it more effectively over the last two years. The perception among them is that it’s much better to share a car compartment with two to four people rather than travelling by bus with around 40 to 50 people.

Several cab aggregators in India have made special arrangements to provide safe shared rides to their passengers. For example, sanitising the car compartment after every ride, sharing the vaccination details of the driver and co-passengers, etc.

Second-hand cars

Buying a second-hand or used car is the most affordable way to own a car. Those who can’t afford a new car can enjoy the ownership of their favourite car by paying a much lower amount. A five-year-old used car can be purchased at around 40 to 50 percent of its invoice value.

The second-hand car market has grown exponentially since the COVID-19 pandemic. The entry of many organised players in this sector has also changed buyers' sentiments.As per a study, India's used car market size was greater 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.

Benefits of buying a second-hand car

As mentioned above, the second-hand car market in India has witnessed a boom since the start of the pandemic in early 2020. Apart from the affordability factor, several other reasons are responsible for this boom. Let’s look at some smart benefits of buying a second-hand car instead of a new one:

1. Value for money

Second-hand cars come with much lower price tags as compared to the new ones. They also offer a value for money to the buyers for the amount paid by them.

For example, the VXI variant of the new Maruti Suzuki Swift Dzire costs around Rs. 8 lakhs at dealerships. However, you can get a second-hand version of the same model and same variant at around Rs. 3 lakhs to Rs. 5 lakhs, depending upon the car’s age and condition.

To get an even better value on a second-hand car, you can approach private dealers directly without the involvement of any middlemen.

2. Slow depreciation rate

One of the huge disadvantages of buying a new car is its value depreciates very quickly. The maximum depreciation in a car's value occurs during its first two to three years. The value of a vehicle starts declining from the moment you take it out of its showroom.

However, the case is different with second-hand cars. When you buy a pre-owned car, its value has already been depreciated by then. Therefore, you will not lose your money as quickly with it as it happens with a brand-new car.

3. Lower insurance and registration costs

You must have noticed that the on-road price of a new car is always higher than its ex-showroom price. It happens because the on-road price of a vehicle includes some additional charges, such as RTO registration fees, insurance costs, etc.

When you buy a pre-owned car, you can save yourself from incurring such costs. Since a pre-owned car has already been registered with the RTO, you won’t have to pay fresh registration charges for it. Also, since the Insured Declared Value (IDV) of a pre-owned car is lesser, it will attract lower insurance costs as compared to new cars.

4. Certified and thoroughly inspected cars

Several people refrain from buying a second-hand car because of the fear that it may start causing problems after a few months. However, the scenario has changed rapidly since the arrival of the organised players in this sector.

You can now purchase a second-hand car from certified pre-owned dealers to ensure peace of mind. Their cars are thoroughly checked and inspected by expert mechanics and are certified as per their condition. Moreover, many second-hand car dealers also provide warranties against any mechanical issues to their cars in the first 12 months.

5. Better for the environment

If you can’t afford a new car, buying a second-hand car is the best option for you. However, another good thing with these cars is that they are good for the environment. Not directly but indirectly.

By buying a second-hand car instead of a new one, you can reduce the carbon dioxide output into the environment. Also, the more recent hybrid vehicles use lithium-ion or nickel-hydride batteries, negatively affecting the environment.

6. Availability of second-hand car loans

This is another common reason why many people don’t want to buy a second-hand car. They think that they will have to make the entire payment in one go while buying a used car. Though, this option is always beneficial if you have the required money, you can now opt for a pre-ownedcar loan as well.

After the second-hand car market in India emerged, several banks and non-banking financial corporations (NBFCs) have started offering used car loans. Some lenders even provide up to 100% financing to purchase pre-owned vehicles. This has made it easier and even more affordable for people to own a private car in India.

Things to know before borrowing a second-hand car loan

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

However, there are certain things that you should keep in your mind while applying for a loan to buy a second-hand car. Let’s have a look at them:

1. Do not opt for a too old or fancy car

The idea of buying a second-hand car can sometimes tempt you to go for an old, fancy car. For example, you can easily get a 10-year-old BMW at the cost of a new Honda City at a second-hand car dealership. Although this might seem alluring, it’s better not to get carried away with such things. Doing so can do more harm than good.

It’s crucial to prepare a budget and buy a car that fits perfectly into it. Also, try to opt for a car that is not more than three to five years old. Most lenders avoid giving second-hand car loans for cars that are more than five years old as maintenance and service for such cars could become difficult.

2. Sanctioned loan amount

Opting for a second-hand car loan is a good idea if you don’t want to pay the entire amount in one go. However, you might have to make a downpayment for buying your car despite availing of a loan. Mostly, lenders sanction up to 80% of the car’s market value as a loan. And you might have to pay the remaining amount out of your pocket.

Also, the lender sanctions the loan amount as per the car’s market value determined by it and not the actual value that you’re paying for the car. It means that if you’ve finalised a deal for a second-hand car at Rs. 5 lakhs, but the lender determines its value to be Rs. 4 lakhs, it might sanction the loan accordingly.

3. Interest rate and loan tenure

The interest rate for a second-hand car is generally higher as compared to new car loans. This happens because the risks associated with a used car are also higher. Although it varies from lender to lender, the interest rate for a used car loan usually varies between 14 and 20 per cent. Factors such as age, type, and make of the car also matter when you apply for a second-hand car loan.

The tenure of a second-hand car loan can range from one to five years. Lenders are usually rigid regarding used car loan tenures as they don’t want to extend their risks over a long period.

4. Eligibility and documentation

The eligibility criterion by lenders for providing a second-hand car loan is usually the same as with a new car loan. For instance, they look for factors like borrowers’ age, monthly income, credit score, etc. Just in the case of a used car loan, they also consider the condition and age of the car.

When it comes to the documentation process for a second-hand car loan, lenders ask for some basic documents such as your PAN card, Aadhar card or voter-id card, bank statements, salary slips, car registration certificate (RC), and insurance copy.

5. Time taken for loan disbursal

A second-hand car loan is not as straightforward as a new car loan. This is why lenders usually take more time to disburse a second-hand car loan than a new car loan

They need to check several things, such as the hypothecation status of the car, whether there is a loan pending on it or not, whether there are pending police cases on the car or not, etc. All these could be time-consuming.

However, this doesn’t mean that you would have to wait for a month to avail of a used car loan. Lenders usually don’t take more than a week to disburse second-hand car loans.

To Conclude

Availing of a second-hand car loan can help you immensely in turning your dream of owning a car into a reality. However, it’s important to compare loan products from different lenders and choose the best-suited used car loan for yourself.

Although used car loans attract higher interest rates as compared to new car loans, your EMIs would still be lesser given the fact that the loan amount will also be lesser.

In case you don’t want to opt for a used car loan, you can try alternative financing avenues for buying a second-hand car. These may include availing of a personal loan, gold loan, loan against property, 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 that’s bestsuited to your requirements.

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