The used car market has been growing at a faster pace than the new car sector for the past couple of years. Most Millenials prefer to spend less on a new car and rather choose an old one, which is also a wise option if you are new to driving. Earlier, it used to be a matter of concern and a tedious task to hunt down used cars that are in good condition. These days, there are tons of websites and apps dedicated especially to buying and selling used cars. Banks and non-banking financial institutions have started giving out loans to people to buy a used car too. This was not the case a few years back when getting a used car loan was a hassle, thanks to collaterals.

Nowadays, you can get a used car loan without providing any collateral or as an unsecured loan, and pay back the loan amount distributed equally over a period of time. This tenure is flexible in most cases and allows the lender to adjust his pay cycle of EMIs to manage his or her finances better. Another big advantage of a used car loan is that it gives every average salaried person the scope to own a vehicle of their own without burning a hole in their pocket. The reasonable EMIs make it further easy and affordable for the general public to buy a used car with a loan.

A used car loan interest rate is a variable and is usually competitive, making it affordable for an averagely salaried person to apply for a loan and make a small down payment to drive the car home. You own the vehicle completely although you have only paid a fraction of the cost upfront in cash.

Although the used car loan interest rates are always higher than a new car loan, you can consider the personal loan option for the same. A personal loan can be taken for any purpose and does have a lower interest rate compared to the used car loan. You can thus easily choose to use a personal loan to purchase a used car instead of applying for a used car specific loan from a bank or NBFC.

What You Need to Consider Before Taking a Used Car Loan

While you are planning to take a used car loan you must consider a few important points that will impact your loan amount, tenure and interest rate. There are various factors that are considered while approving a used car loan. The condition of the vehicle plays an important role in determining the loan amount as well as the interest rate.

Consider the age of the car: Age will be in terms of years the car has been in operation. You must keep in mind that you will not get a loan for a car that is older than 10 years, in most cases. Before you decide to finance a car, it is ideal to check the operational years of the car. Most banks and NBFCs prefer to finance a car that is 7-8 years old and not more. It might vary from institution to institution, but one thing remains constant is that the age of the car is a factor.

Condition of the vehicle: The condition of the used car will also determine the loan amount that can be approved for buying the car. It will largely depend on the years it's been running, the number of owners, working condition of the vehicle and other such factors. If a car is in a rather good condition with an average kilometre run over the years, the finance approved will be higher compared to a car with known faults and more kilometres clocked over the years.

Documentation: Before you decide to buy a used car, it is ideal to check the documentation thoroughly. Check for the road taxes paid, insurance coverage if any, any service and repair record and so on. These will allow you to make an informed decision and avoid getting duped for an old car that does not function well. A car with proper documentation and lesser repairs will always attract a better loan amount with better interest rates.

Tenure: While you are applying for a used car loan, you must bear in mind that your loan tenure should not exceed the 10-year limit cumulative of your loan agreement. If by the end of your loan tenure, the vehicle’s age exceeds the 10 years limit, you are more likely to get your application rejected.

Personal Loan vs Used Car Loan

As we discussed earlier, a used car loan, considering the depreciating value of the vehicle, attracts a higher interest rate than you are likely to come across for a new car loan. In most cases, personal loan interest rates are more flexible and affordable compared to a used car loan. The best part of taking a personal loan is that it is an unsecured loan and has flexible tenure and interest rates.

Thus, before you decide to apply for a used car loan, be sure to check the personal loan options. A personal loan can finance the whole amount rather than the 80-85% value a used car loan generally offers. ***