Lots of people nowadays consider owning a personal car for their daily needs. Most customers choose a used car because they are value-conscious, even if some may prefer solely buying brand-new automobiles. Undoubtedly, value for money is a key consideration.
A used automobile with a significant initial depreciation in value will also make it more affordable for you to purchase a higher-category vehicle in the future. A car that is two years old might cost 20–30% less than a fresh model.
Additionally, almost all automakers have pre-owned sections, and a number of banks, as well as non-banking financial institutions (NBFIs), provide attractive rates and discounts on used automobiles, including zero down payments. So, if you want to purchase a used automobile, should you choose a car loan?
Used-car loans have higher interest rates
Banks, NBFCs, and financial technology firms offer loans for used vehicles. The interest rate of the loan is the primary part you should look at. Loans for secondhand automobiles typically have higher interest rates than financing for new automobiles.
Although used automobile loans have a minimal interest rate of 9.25 percent, other institutions provide loans with interest rates as high as 16.3 percent. The rate of interest for used auto loans may potentially exceed 20% because financial institutions may charge significantly higher rates than the minimal rate.
A new automobile has a significantly lower financing rate that starts at 8.6%. Especially in comparison to a used automobile, even the highest range of financing rates on a new car is significantly lower.
Loan for used vehicles: Shorter term
A used-car loan could have a shorter term. The maximum payback period for virtually all of these loans is between one and five years. Several lenders do, however, permit a payback period of up to seven years.
Why do banks charge such high-interest rates for loans for used cars?
Banks offer used cars higher credit rates than newer models for two main reasons: A car loan is a loan that is backed by collateral from the automobile itself. Keep in mind that because the automobile is an asset that depreciates, the fair market value of the security decreases over time along with the amount of money owed on the loan.
To address this issue, banks normally only give out between 80 and 90 percent of the car’s value. The second issue is that the overall number of owners has an impact on the automobile’s value at the time of sale, which implies that a brand-new car will sell for more money than a used vehicle of the exact same age. Additionally, a used automobile experiences more wear and tear, which lowers its market value. To address these two issues, banks often charge higher interest rates on used-car loans because there is a risk associated with doing so.
Should you seek a car loan for a used vehicle?
Car loans have a number of limitations, including high-interest rates, smaller loan amounts, and a short term. Is it a smart choice to take out an auto loan for a used automobile considering each of these factors?
Auto loans should be avoided as much as possible since the asset’s worth begins to decline as soon as it is put into use. Private banks impose a higher interest rate when lending money for secondhand cars.
Used vehicle loans often cost between 13 and 14 percent more per year than new automobile loans, which are normally accessible at approximately 9 percent annually. Processing fees are added. It just doesn’t make any sense to obtain such a loan given the extra cost of 4-5 pet cents imposed by banks for used car loans.
What alternatives to auto loans are there if you want to purchase a used car?
So how will you arrange the purchase of a used automobile if you aren’t interested in taking out an auto loan? If the rate offered for a second-hand automobile loan is far higher than planned, car purchasers can think about taking out a personal loan, a top-up house loan, or some other credit facility using investments in mutual funds or fixed deposits.
- Personal loan: If you want to buy a car, you can choose a personal loan because they are frequently less expensive than loans for old cars. You may also seek personal loan options depending on your credit report, which may include loans that are pre-approved or loans with no processing fees. You may apply for a personal loan whether you have outstanding credit or not, and the cost of the interest rate is at least one percentage point cheaper than the interest rate offered on secondhand vehicles.
- Home loan top-up: Individuals who already have a house loan might choose a top-up in order to fund the purchase of a used automobile. According to experts, taking out a home loan top-up may enable you to obtain a bigger loan sum with a cheaper interest rate and a longer repayment term, determined by the loan duration and existing loan amount. If you have an active house loan, try a top-up loan.
- Loan against investment: Another option for financing your used automobile is to take out a loan that is secured against the investments you have made, such as fixed deposits or mutual funds. FD loans are less expensive than loans for personal use.
- Gold Loans: You can also think about taking out a loan on behalf of your gold stocks to pay for your used automobile purchases. A number of lenders provide gold loans with enticing interest rates. If you observe the bank-to-bank gold loan interest rates, you will realize that gold loans have interest rates that are far lower than those for other types of loans.
Conclusion – After all, your financial condition, interests, and objectives will determine whether you choose a new vehicle loan, a used car loan, a personal loan, or a gold loan. When selecting your choice, take into account aspects like your budget, your choice of financing options, your readiness to absorb the first depreciation hit, and your desire for the most recent features. Before making a decision, it’s wise to compare financing offers and consider both brand-new and used automobile options.