Tips to reduce pre-owned car loan interest rate

8 Tips to Reduce Your Pre-Owned Car Loan Interest Rate

Most people prefer buying a second-hand or used car after they turn 18 and obtain a driving license. The justification is that it is good to buy a new car after honing one’s driving skills on a used car. Many of us, of course, make the decision based on our affordability.

Fortunately, financing a used car is no longer a nightmare. Many lenders in India, including Non-Banking Financial Companies (NBFCs) and private banks, offer used car loans for purchasing pre-owned/second-hand/used cars. Before deciding on the loan interest offered to the borrower, they take several factors into account. For instance, the model and age of the vehicle are vital. Lenders evaluate the car's age and whether the model is still available or has been discontinued.

If you plan to buy an old car, it can be challenging to obtain sufficient funding. You should shortlist a newer car model and a vehicle that is not more than 2 to 3 years old. The loan tenure and the age of the used car should not add to more than 8 to 10 years.

Benefits of buying a used car

Many consumers don’t wish to buy a second-hand car and instead dream of owning a new one. Lack of trust in previous owners, fear of high maintenance, old technology, poor fuel efficiency, and scarcity of spare parts are some reasons that restrict them from buying a pre-owned vehicle. If you aren’t convinced as well, here’s a look at the various benefits of buying a used car:

  • Newer drivers, who are learning to drive, can practice on a used car instead of denting a brand new one. After perfecting the art of driving, you can buy a brand new vehicle of your favorite model and drive around without any worries.
  •  Many organized used-car dealers exist in the market, ensuring that the car you purchase is certified, well-maintained, and damage-free.
  •  Used cars are not subject to sales tax.
  •  You enjoy instant delivery since there is no waiting period as in the case of new cars.
  •  Compared to a new car, it is much less expensive.
  •  The down payment for a used car is lesser than the down payment for a new car.
  •  Two years after purchase is when a car depreciates fastest. As the owner of a second-hand car, you do not have to worry about depreciation rates and costs.
  •  You can buy a high-end used car with advanced features for the same price as a brand new car with moderate features.

With the help of a used car loan, you don’t need to break your FD or any other long-term investment scheme to buy the car of your choice.

What is a car loan?

A car loan helps you arrange the money you need to pay for the on-road price of the car. In the case of a used car, it provides the money that would cover the price at which the seller wants to sell the vehicle. Banks and NBFCs offer car loans with inclusions of prices like insurance, road tax, registration, and other additional charges.

What do interest rates on used car loans refer to?

Auto loan interest rates refer to the amount the lender charges for providing the loan. It is a percentage of the total amount you borrow. The interest rates on used car loans are higher than the interest rates on new car loans.

There are several reasons for the same:

1. The car is old and losing value already.

2. The dealership has to spend a lot more to ensure that the car is running.

3. Since the vehicle is older, the seller has spent a lot of time and money arranging financing options.

Tips to reduce used car loan interest rate

Various factors affect the interest rates on a used car loan. Knowing these factors can help you lower the interest rates in several ways.

1. Make a more significant down payment.

Lenders offer loans at lower interest rates if you make high down payments. Since the principal amount is low, the EMI amounts are lesser, along with a lower loan interest rate. Of course, you can save upfront with a smaller down payment. But in the long run, it leads to a relatively higher interest rate. Moreover, paying a high down payment lets lenders know that you are financially sound and capable of repaying the loan.

2. Look into your credit score.

One of the most vital aspects lenders consider before approving your loan and determining the interest rates is your credit score. Make sure you check your credit history before getting a loan. The credit score is an indicator of your ability to repay the loan. If you have a bad repayment history, lenders will increase the interest rates. Conversely, with a CIBIL score of 750 and more, you can get loans at a lower interest rate.

Looking into your credit score can help you better assess your financial profile. Thereafter, you can take steps to improve or maintain your CIBIL score, like paying your credit card bills and existing loan EMIs on time.

3. Debt-to-Income ratio

The debt-to-income ratio is a metric used to determine your capability of paying the EMIs on time. It is a vital factor for lenders and helps them decide the used car loan interest rate. If you have a high debt-to-income ratio, your loan application will either be rejected, or you will be charged higher interest rates.

4. Opt for a shorter repayment tenure

Another essential factor to consider for your used car loan is the repayment tenure. While a longer tenure comes with lower EMIs and interest rates, you will end up paying more interest. It is because the total interest payable continues to increase with time.

The interest rates for a shorter tenure are high, but the overall amount you pay for the car will be low. The EMIs will be bigger, but the total interest payable will be lesser. Depending on your budget, income, and repayment ability, go for the shortest loan repayment tenure. You can use the EMI calculator to check the EMI before deciding on the repayment tenure.

5. Vehicle model and age

You do not need to provide any security for a used car loan. If you fail to make monthly payments, the lender will seize the car. Therefore, the lender assesses the age and model of the car. If the model is now discontinued, the interest rate is higher. On the other hand, the interest rate on newer cars is low. Moreover, if the car is from a reputed manufacturer, the interest rate may be low.

6. Income

Your income is an essential determinant of your used car loan’s interest rate. Lenders evaluate your income to decide on the interest rate suitable for you. If you have a steady income and a stable occupation, you can enjoy a lower interest rate. Your employer or the company you work for is also vital to determining the interest rate.

7. Relationship with the bank

Before searching for lenders, you can contact your existing bank to learn more about the used car loan interest rates it offers. If your relationship with the bank is good, you have higher chances of lower interest rates. You are also better positioned to negotiate the interest rates with your current bank.

8. Compare various lenders

If you are in pursuit of a used car loan with competitive interest rates, you must compare the interest rates of different lenders. You must also check for festive offers and schemes. The internet has made it easier for you to evaluate the details of various available loan products online.

Used car loan eligibility

A salaried professional or self-employed individual between the age of 21 and 65 years, having a steady income and a stable occupation, is eligible for a used car loan. Different lenders offer different loan amounts, loan tenures, and interest rates.

Since second-hand cars have a lower resale value, used car loans' interest rates are higher than new car loans. However, using different factors to your advantage, you can negotiate with the lender for a better interest rate. Additionally, compared with a new car, the insurance cost of a used car is higher. It is because the maintenance cost of an old car is high, and there is also a scarcity of spare parts.

Features and benefits of a used car loan

Like any other auto loan, used car loans also offer some benefits to the borrowers.

  •  Most lenders, especially banks, offer a long loan tenure.
  •  The application process is easy, and most lenders let you complete the process online.
  •  You can avail of a loan for up to 90% of the car’s value.
  •  The loan amount is lesser than that required for a new car. As a result, the EMIs are smaller.
  •  The insurance costs and depreciation rates are lower than those for a new car.
  •  Few lenders offer flexible repayment terms.
  •  It involves a simple documentation process and the submission of minimum paperwork.

What is the process to apply for a used car loan?

Generally, banks provide loans for up to 85% to 90% of the total value of second-hand cars. The loan tenure varies between 1 and 5 years. The loan tenure and the total age of the car should her not exceed 8 to 10 years. When you reach out to a bank to apply for a used car loan, the bank will appoint a representative to assess the value of your car. As per the assessment of the valuation expert, you can receive a used car loan for around 85% to 90% of the total car value. You will have to make a down payment from your pocket to cover the remaining amount. Paying a higher down payment reduces the principal amount of the loan, thereby reducing the interest rate.

To start, find a lender suitable for your requirements. Check the loan tenure, interest rates, and carefully read the terms and conditions of the used car loan. Once you are satisfied, visit the financial institution’s website. Download the application form for a car loan. Fill in all the required details and collect all the necessary documents for submission. These documents include:

  • Proof of Identity (Driving License, Aadhaar Card, or passport)
  • Proof of Age (Driving License or PAN Card)
  • Proof of Income (Form 16, salary slips, and last 6 months’ bank statement)
  • Proof of Address (Aadhaar Card, utility bills, or ration card)

Using these documents, the bank will verify your details and process the used car loan. After approval of the loan, the bank will disburse the loan amount into your bank account. If you are not comfortable with the online application process, you can visit the nearest branch to apply for a used car loan.

EMI for a used car loan

You need to pay a second-hand or used car loan through Equated Monthly Installments (EMIs) spread across a predetermined loan tenure. Using the free online loan EMI calculator, you can find out how much your used car loan will cost you monthly. This calculator is available on the bank’s website as well as third-party comparison portals. The use of the tool is simple and easy.

To estimate the EMI amount, you need to enter the loan amount, interest rate, loan tenure, and processing fee. You can fill in different used car loan interest rates to check how it changes the EMI.

Wrapping up

With a little bit of research and hard work, you can find a used car of your choice at the best possible price. When applying for a used car loan, make sure you read the interest rates you need to pay. If the interest rate is high, it will deeply impact your pocket. So before applying for the loan, always take all necessary steps to ensure that the interest rate is as low as possible.

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