There is never an easy decision to make. To buy a car or not is in itself quite a thing to think about, to top it you must decide whether you want to buy a new car or a used car. People buy used cars for quite a few reasons like they have a limited budget, they want to polish their driving skills on a used car before they move on to a new car, some want to use it as a cab, others wish to upgrade to a higher model with a constrained budget etc.
For example, you can buy a second hand Skoda Superb in the budget of a Honda City. So you have made up your mind on buying a second hand car, you have zeroed in on the one that suits you but you are not sure on how to pay for it. Worry not. Read this to get a clear picture.
Options for funding a Used Car
The first choice is pretty obvious; you can self finance the car. That is you pay for it completely out of your pocket. The second choice is quite obvious too; you take a bank loan. Thus we reach at another hard decision to make – must you take a personal loan or a used car loan? So you stand at a fork in the road on which loan to pick. Let us make it easier for by listing their pros and cons here.
If you take a Personal Loan
Supposing you decide to take a personal loan, then you will benefit from saving money on down payment. You can unfailingly get a loan for upto 100% of the car value that you perceive. It will be a quick and easy process, requiring minimum documentation. The money saved can be invested in an alternate medium of investment.
However, be prepared to shell out more in interest payments as it is an unsecured loan. Unsecured personal loans carry high interest rates.
If you take a Used Car Loan
If you take a used car loan then you will be eligible for only 75%-90% of the value that the bank attaches to the vehicle. For example, you have agreed to buy a second hand a Toyota Corolla for 8 lakhs but as per the bank its fair price is only 7 lakhs. So you will be eligible for a loan of 80% of 7 lakhs which is 5.6 lakhs. This means, the balance 2.4 lakh must come from your own savings. This can be quite a dent in your plans.
On the flip side, since this a secured loan, even though second hand but the car is mortgaged with the bank until the loan is paid off, so the rate of interest is certainly lower than that paid on a personal loan.
Prominent banks like ICICI, Kotak, HDFC, SBI, Axis, etc. all deal in personal loans and used car loans. Even NBFCs such as Tata Capital, Mahindra Finance etc. also provide both loans. So there is no dearth of credit institutions.
If you satisfy the eligibility criteria for any of these loans with any of the lending institutions then you will not find it difficult to get finance. But the question still remains on which one you should pick.
Both these loans are given for not more than 5 years.
A Précis of the Above
Initially, one might feel that a personal loan seems like a better option. But the scales soon tip in favour of used car loans as one realises the difference in interest rates, especially if one has a poor cibil score and looking for a credit solution.
Let us take HDFC bank for an example. If you take a HDFC personal loan then you must pay an interest somewhere between 15%-22%, depending upon your credit score. With a much lower score, you even risk your application being denied. However, if you take a Pre-Owned Car Loan from HDFC then you can relax a bit as the interest rate is somewhere between 14.5% to 17.5%.
If you take a loan of 5 lakhs for five years then a personal loan with 18% rate will cost you 2, 61, 802 in rupee terms. If you take a used car loan for 5 lakhs for the same period at 16% then it will cost you 2, 29, 541 in rupee terms.
So you see both these type of loans has their own relevance. If you need a greater car value then you could opt for a personal loan. But if saving money on interest is important to you then gun for a used car loan.
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