Owning a car is still an aspiration for most Indians. While for many people a car is just a better way to get to work or take their family on an outing, for many others it is still seen as a status symbol. . According to the National Family Health Survey (2019-21), the total percentage of households in India that own a car is only 7.5%. If this proportion is increasing (it was 6% in 2018), it still shows that owning a car is a relative rarity in India compared to developed countries.
Banks and Non-Banking Financial Companies (NBFCs) have made car ownership much easier for a large portion of middle and upper class Indians. These lending institutions offer loans with attractive features aimed at simplifying car ownership. Attractive interest rate, flexible repayment tenure, high loan amount (as % of car cost), simple digital process and fast disbursements are some of the factors that contribute to growing car ownership. a car in India. Also, owning a car doesn’t always mean buying a new car. Owning a used, second-hand or used car is an option that is gaining more and more popularity in India.
For an individual considering buying a new or used car, there are several loan providers operating in the market. A car loan is intended to facilitate the purchase of a new car while a used car loan facilitates the purchase of a used car. Although both of these products aim to make car purchases easier, there are several differences between these products. It is important to understand both loan types to make an informed decision.
What is a car loan?
A car loan (also called car loan or automobile loan) is a loan offered by a lender to the borrower for the purchase of a new car. It is a secured loan with the vehicle acting as tangible collateral. The borrower repays the lender in the form of equivalent monthly installments (EMI) at a predetermined interest rate and a predetermined term. Apart from the EMI, certain fees and taxes are also levied by the lenders. One has to read the fine print carefully to be fully aware of the fees which sometimes may not be very apparent.
What is a used car loan?
A used car loan is also called used car loan or used car loan. It is also a secured loan, but in this case it allows the borrower to buy a used (used or used) car. Similar to the loan for a new car, a used car loan is repaid by the borrower in the form of EMI at a predetermined rate and term. The loan amount approved by the lender depends on the age of the car, physical condition, general health and operating parameters of the car, in addition to a host of other borrower-specific characteristics. . As with a car loan, read the fine print carefully so that there are no (hidden) fees that may surprise you later.
Difference Between New Car Loan and Used Car Loan
If their underlying remains the same (car), auto credit and second-hand auto credit differ on many parameters. Let’s look at a few.
1. Condition of the underlying vehicle
A car loan is contracted for the purchase of a new car; the buyer is thus assured of the “newness” of the vehicle. The vehicle is shipped from the factory to the warehouse and later to the dealer’s showroom and is therefore in immaculate, unused condition with all features working perfectly well.
On the other hand, a used car loan is contracted for the purchase of a used car. Therefore, it is very important to check the condition of the car that one intends to buy. Some features might not be as efficient as in a new car. The buyer should be aware of this so that there are no unpleasant surprises later. In recent times, many organized players have entered this segment. They carry out numerous checks on the vehicle before buying it from the previous owner and reselling it to a new buyer. The cost of the used car is determined by the age of the vehicle, the physical condition, the condition of the engine and the components, etc.
2. Interest rate
The interest rate for a used car loan is slightly higher than for a car loan. Indeed, buying a used car is more risky for the reasons mentioned above. Car loans in India are currently available at interest rates starting from 7% per annum, while used car loans start from 10% per annum. Interest rates are subject to change according to the conditions in force.
3. Duration of the loan
A car loan generally has a maximum term of seven years. On the other hand, deciding the length of a used car loan is a bit tricky. This is because the value and usefulness of a car decreases with the addition of years of use. Typically, the term of a used car loan is no more than five years. Given the limited remaining life of a used car, it is in the interest of the borrower to take out a low-term used car loan or pay off the loan before the actual term.
4. Loan Approval Process
Approval for a used car loan takes longer than a new car loan. Indeed, in the first case, the lender carries out a thorough check of the car. If the used car is purchased from an unorganized player, the payout time is slightly longer. In the event that the used car is purchased from an organized actor, the disbursement period could be less. Indeed, the organized actors carry out an in-depth examination of the vehicle before buying it from the first owner. Therefore, the time spent by the lender to appraise the vehicle is less.
5. Loan-to-value ratio
The loan to value ratio (LTV) involves the amount of the loan disbursed in proportion to the value of the car. The LTV of a used car loan is slightly lower than that of a car loan, due to the inherent risks. The LTV for a new car loan can be as high as 100%, while for a used car loan it can typically be as high as 80-90% of the car’s value.
Despite these differences, there are commonalities between these two types of loans. First, the borrower has to do a detailed research to find the right lender. Second, lenders prefer borrowers with high credit scores (preferably above 750). Most importantly, borrowers should be disciplined with loan repayment so that there is no negative impact on their credit score.
A surge in financing options, online used car marketplaces and lenders’ borrower-friendly policies have boosted car purchases of late. Along with new car loans, used car loans have emerged as an alternative option for those who wish to commit a lower amount towards the purchase of a car. It is up to the borrower to make the right choice when deciding on the type of car (new or used) and the lender.