Owning a personal vehicle has become a necessity for many. While several people may prefer buying only a new car, there are a good number of buyers who go for a second-hand car due to their value-conscious approach. Cost-effectiveness is, of course, a major factor. A used car with significantly depreciated value in initial years also helps you greater affordability to own a higher-category vehicle later. A two-year-old vehicle can be 20-30 per cent cheaper than a new one. Further, most car companies have their pre-owned divisions, and several banks and non-banking financial companies (NBFCs) offer lucrative rates and deals, like zero down payment, on second-hand cars. So should you opt for an auto loan to buy a pre-owned car?
You have to pay higher interest rate on used-car loans
You can get a loan for a second-hand car from banks, NBFCs or even fintech platforms. The first thing that you need to check is the interest rate of the loan. The interest rate on loans for used cars is usually higher than that on loans for new cars. While the minimum interest rate of loans for used cars starts from 9.25 per cent, some banks offer loans that start with 16.3 per cent per annum interest rate. Lenders may charge a much higher rate than the minimum rate and, hence, the higher interest rate for used car loans can even go beyond 20 per cent. The interest rate for a new car is much lower — it starts at 8.6 per cent. Even the upper band of the interest rate on a new car is much lower when compared to a used car.
Second-hand car loan: How much loan can you take?
Further, in the case of used-car loans, you get a relatively lesser loan amount — typically up to 85 per cent of the value of the car — depending on the lender. "Now most lenders give around 60 per cent to 85 per cent of the value of the used vehicle as loan, whereas in case of new vehicles, it is 85 per cent to 100 per cent," says Abhishek Kumar, SEBI Registered Investment Adviser and Founder of SahajMoney.
Pre-owned car loan: Shorter tenure
The tenure for a used-car loan could be lower. In most such loans, the maximum repayment tenure is between one and five years. However, some banks do allow a repayment tenure of up to seven years.
Why banks charge high interest rate on pre-owned car loans
There are two reasons why banks charge more interest rates for used cars than for new ones. Abhijit Talukdar, SEBI Registered Investment Adviser & Founder, Attainix Consulting, says, "A car loan is a secured loan because the loan is secured by the car itself. Do remember that the car is a depreciating asset, hence with time, the value of the security goes down along with the loan outstanding. Banks typically only disburse 80-90 per cent of the car's value to counter this problem. The second problem is that the resale value of the car is affected by the number of owners, which means that a new car will have better resale value compared to a used car of the same vintage. A used car is also affected by greater wear and tear, which also affects its value. Banks typically demand a higher interest rate on used-car loans to counter these two problems, since the risk of recovering the actual value of the used car is much higher for the bank in case of a default."
Raj Khosla, Founder and MD, of MyMoneyMantra.com, says out-of-warranty products and multiple ownerships diminish the resale value, so lenders typically bankroll up to a maximum of 70 per cent of the market price quoted. “Moreover, the cost of insurance is not covered under the loan. Borrowers may also find it rather difficult to secure the desired loan for second-hand cars nearing the vehicle scrappage timeline," he says.
| USED CAR LOAN-RATES AND CHARGES | ||||
| Name of Lender | Interest rate (%) | Processing fee (% of loan amount) | LTV/Margin Money | Loan Tenure |
| Union Bank of India | 12.90-13.00 | Flat Rs 1,000 | Minimum 40% | Up to 5 years |
| Punjab National Bank | 9.80-10.60 | 0.25% (Rs 1,000-Rs 1,500) | 25% of value of car | Up to 5 years |
| Bank of Baroda | 11.90-14.70 | 0.50% (Rs 2,500 - Rs 10,000) | Up to 75% on market value or up to 75% on agreement value or 100% on IDV value, whichever is less | Up to 5 years |
| Bank of India | 9.25-11.25 | Up to 1% (Rs 500-Rs 10,000) | Up to 70% | Up to 7 years |
| UCO Bank | 11.20-11.70 | 0.50% (Up to Rs 5,000) | Minimum 20% of valuation in case of certified car dealers or 30% of valuation in other cases | Up to 5 years |
| State Bank of India | 11.25-14.75 | 1.25% (Rs 3,750-Rs 10,000) | Up to 85% of ex-showroom price | Up to 5 years |
| Bank of Maharashtra | 12.45-15.30 | Up to 0.50% (Rs 500-Rs 5,000) | Minimum 50% of value of second hand car | Up to 5 years |
| ICICI Bank | 11.25 onwards | 2% or Rs 20,000, whichever is lower For Pre-approved- Rs 4,000-Rs 6,000 | Up to 80% of offer amount | Up to 7 years |
| HDFC Bank | 13.75 onwards | Up to 0.50% (Rs 3,500 - Rs 8,000) | Up to 100% of the value of car | Up to 7 years |
| Federal Bank | 16.30 onwards | Rs 3,000-Rs 5,500 | Up to 100% of ex-showroom price | Up to 7 years |
| Rates and charges as of 19th July 2023 | ||||
| Source: Paisabazaar.com | ||||
Should you take an auto loan for a second-hand car?
Car loans come with various restrictions such as high-interest rates, reduced loan amount, and shorter tenure. Considering these factors, is it a wise decision to take an auto loan for a pre-owned car?
"One should skip auto loans as far as possible as the value of the asset starts depreciating from the moment it comes on to the road. In the case of used vehicles, the interest rate charged by private banks is more than 1.5 times higher than on new vehicles. So buying it on a loan is more disadvantageous," says Kumar.
Talukdar has a similar view. "New-car loans are typically available at around 9 per cent per annum whereas used-car loans are available around 13-14 per cent per annum. Processing charges are extra. Given the additional premium of 4-5 pet cent demanded by banks for used cars, it does not make sense to avail such a loan."
Want to buy a second-hand car: What are the other options than auto loans?
So, if you are not taking an auto loan to buy a second-hand car, how should you finance it? Experts ET Wealth Online spoke to suggest a few alternatives. Car buyers should consider taking a personal loan, a top-up home loan, or any other credit facility against mutual fund units or fixed deposits if the rate quoted for a second-owned car loan is way higher than expected. The interest rate for a new car nearly remains on a par with the rate quoted for a top-up home loan, or a loan against fixed deposits," says Khosla.
Personal loan: You can opt for a personal loan to buy a car as these are often comparatively cheaper than used-car loans. You can also check personal loan offers available based on your credit profile — such as pre-approved loans or zero-processing free on personal loans. "If you have a good credit score and the interest rate of the personal loan is at least 1 per cent lower than the interest rate charged on used vehicles, you should try a personal loan," says Kumar.
Depending on your credit history, you can get a bigger loan amount, longer tenure and lower interest if you apply for a personal loan instead of an auto loan for used cars.
| Rs 10 Lakh Loan | ||
| Loan Type | Interest Rate | 5-Year EMI (per month) |
| Pre-Owned Car Loan | 10% | Rs 21,247 |
| Top-Up Home Loan | 8.20% | Rs 20,372 |
| Loan Against Mutual Fund | 9% | Rs 20,758 |
| Loan Against FD | 8.10% | Rs 20,324 |
Note: The lower end of interest rate is considered for calculation. Pre-owned car the minimum loan rate may go up to 16%, a top-up home loan rate, a loan against mutual funds and a loan against FD may reach up to 9.5%, 10% and 8.7%, respectively.
Home loan top-up: Those who have a home loan can opt for a top-up on their home loans to finance their pre-owned car purchase. Depending on the loan tenure and outstanding loan amount, availing a top-up on a home loan could help you get a bigger loan amount with a lower interest rate and longer tenure, experts say. "Try a top-up loan if they have an ongoing home loan. This way, they can fund the entire value of used vehicles and loan tenure would also be higher. To reduce interest outgo due to higher tenure, they can prepay the loan," says Kumar.
Loan against your investments: You can also take a loan against your investments such as a fixed deposit or mutual funds to finance your second-hand car. Loans against FDs are cheaper than personal loans or most secured and unsecured loans.
Gold loan: You can also consider taking a loan against the yellow metal you have to finance your second-hand car purchase. Several lenders offer an attractive interest rate on gold loans. Gold loans in HDFC Bank and Kotak Mahindra Bank start from 8 per cent. In South Indian Bank, gold loan starts from 8.25 per cent. In Central Bank of India, gold loans start from 8.45 per cent. As you can see, the interest rates of gold loans are comparatively lower than the interest rates of pre-owned car loans.
