Owning a car – new or second hand gives a sense of pride to the owner of the car. However the efforts required to own a car is not easy. This is because, not everyone has required financial support to buy car. And this is when car loan is helpful.
There are many financial institutions offering car loan for new and used car. The key factor to be taken into consideration when taking any loan is the interest rate and other charges such as processing fee, pre-payment penalty, etc.
Listed in the below table is the interest rate on new car and used car by 17 banks in India:
|Name of Bank||New Car Loan Interest Rate||Used/Second Hand Car Loan Interest Rate|
|ICICI Bank||10.75% - 12.75%||15.5%|
|State Bank of India||9.25%||10.45%|
|Oriental Bank of Commerce||10.45%||12.7%|
|Bank of Maharashtra||9%||9.5%|
|Indian Overseas Bank||9.05%||10.05-11.05%|
|Karur Vysya Bank||10.85%||13.1%|
|Punjab National Bank||9.85%||NA|
|Bank of Baroda||9.6%||NA|
|Axis Bank||11.00% - 12.00%||NA|
High interest: So as you can see in the above table, the interest component is very high in case of used cars. The reason for having such a high interest rate is the risk associated with the used car. In case of default, even if bank tries to sell-off the used vehicle, its market value would have depreciated further.
Read more on car loan for low salaried individuals.
Factors to consider before selecting loan for car:
Loan amount: In case of new car loan, 100% loan amount equal to the value of the car is granted by most of the banks. But in case of used car, the amount is 70%-80% of the current value of the car.
Interest rate: Higher the rate, higher will the money you’ll end up paying. So select the loan with lowest interest.
Low credit score: If your credit score is low, then also you can get loan. Your income and relationship with the bank will come to the rescue.
However for the second hand car, there are further terms and conditions applied. And based on these factors, car loan for used vehicle is approved or rejected. The factors are:
1) Age of the car: Lenders offer finance to only those cars which are less than 5 years old. Few banks also limit the age to 3 years.
2) Make and model: If you are planning to buy second hand car whose make/model is no longer manufactured or has poor demand, then loan application will get rejected.
Other option to get loan for second hand car: There is only one option that remains for financing your car which is personal loan. And there are reasons to take personal loan for car.
Personal loan for car offers following advantages over car loan:
- You can use the money for any purpose – car modification, repair works etc.
- There is no down payment required
- You can get personal loan against fixed deposit, LIC policy, securities such as shares, mutual fund.
- You can buy used car irrespective of the age
- Car remains on your name
- No need to change hypothecation at RTO and insurance document.
- When you take car loan, the owner of the car becomes your lender. And untill you pay-off everything, the vehicle remains in the custody of the lender. But even after repayment of all EMIs; two most important formalities need to be carried out i.e. hypothecation at Regional transport office (RTO) and name change in the insurance policy document.
- You can sell the car even when your loan is active. This is not possible in case of car loan until all the repayments are fully paid.
Few cons of personal loan over car loan are:
Higher interest rate: Since it is a non-collateral loan, the risk is high for the lender. This is the reason why interest rate is high for personal loan.
Poor credit score: You may not get personal loan, if the credit score is poor. But there are higher chances of getting car loan, as the vehicle is under the control of the lender. Even if you manage to get personal loan, the interest rate would be high due to poor credit history.