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What to keep in mind before taking a loan to buy a used car

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As the lockdown is lifted in a phased manner, the auto industry expects the sale of cars to rise. Many of these buyers are looking for a used car as they may use it for limited time, until the threat of the pandemic looms large.

One of the reasons for individuals to look for a used car is limited budget. “There is economic uncertainty. While buyers want a car, they have limited budget. That’s why many are opting for a used car instead of a new one,” said Niraj Singh, CEO and founder, Spinny, a platform for pre-owned cars.

According to him, this is true for those who don’t have a vehicle as well as for those who have a car but need another for the mobility of other family members.

But financing your used car purchase can be confusing as the interest rates are far higher (by 3-7%) than what lenders offer on new cars and each lender looks at different parameters. “Interest rates for used-car loans are generally higher compared to loans for new cars. This is because the risk is higher with a used car. On the one hand, the financer views the profile as slightly riskier. On the other hand, very little history of the vehicle can be ascertained,” said Abhinav Kaul, vice-president, strategic partnerships, BankBazaar.

A manufacturer provides a warranty on a new car, which is not the case with a second-hand vehicle. There is no clarity on the state of the car, the accidents that must have happened, the condition of parts and engine, and so on. It is for these reasons that lenders view pre-owned cars as risky.

Factors such as the type and age of the car matter when you go for a loan for used cars. “For instance, the average lifespan of a car is usually considered to be 15 years. Most banks may not fund a car older than 8-10 years. In this case, the tenor of the loan will not exceed the same time span. So, if you are buying a five-year-old car, your loan tenor will not be more than three to five years. Also, most banks will not finance more than three re-sales,” said Kaul.

In used cars, there could be other complications as well. The existing owner could have an outstanding loan on the four-wheeler. In this case, the seller will need to first close the existing loan, avail a no-objection certificate from the lender, get the hypothecation removed from the registration certificate (RC) and get a new RC book without the hypothecation, before selling it. All this could be time-consuming.

If the buyer is willing to carry out most of the procedure himself or through an agent, instead of going for a used car loan, the better option is to look for alternatives. One option is to take a top-up loan if you have an ongoing home loan. The interest rates on top-up home loans are far cheaper and the procedure is simpler compared to getting a loan for a pre-owned car.

A lender, typically, provides loans up to 75% of the used car value. If you opt for a top-up, you may be able to fund the entire purchase. Consider a personal loan, provided the rates are at least 1.5% lower than the rate for the used car loan.

Many used car platforms also tie up with lenders and offer a used car loan at a cheaper cost. Spinny, for example, offers used car loans at 12.5% from its partners.

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