Buying a car is a decision that requires careful consideration about various aspects. One such aspect that needs to be weighed and decided upon is whether to buy a new car or a used car. Depending on the fact whether one is buying a used or a new car, the appropriate mode of financing needs to be chosen. Most financial institutes offer loans for both a pre-owned car and a new one. Below we compare the features of both.
Used Car Loan and New Car Loan:
Both the loans have distinct features and advantages, depending on the buyer’s needs and requirements they will choose the right kind of loan. A few differences are highlighted below:
New Car Loan
Used Car Loan
Interest rate is lower in these loans.
Interest is higher for this type of loans.
Loan tenure is longer
Loans tenure is shorter.
Loan amount & LTV ratio is higher
Loan amount and the LTV ratio is low
Lower down payment required
Bigger down payment required.
Interest Rate: Whenever you take a loan you have to pay an interest on it. The car loan interest rate for pre-owned cars is higher by 5% to 7% as giving a loan for an already used car is riskier than giving it a for a new vehicle.
Loan Tenure: The duration of a loan for a new automobile ranges from 5 to 7 years, for pre-owned vehicles it is between 3 to 5 years. For used cars lenders want the age and loan tenure to fall within eight years. Thus if car is 5 years old then the loan tenure can be 3 years maximum.
Loan Amount: Loan up to the 90% of the car value is available when a new car is bought. However when buying a used car, the LTV ratio for the loan is much lower. Lenders may sanction a loan up to 70% of the car value; sometimes it may be only 50% of the car value depending on the car valuation and authenticity of the documents.
Down payment: Value of a new car is more than a used one; even though the loan amount is higher the down payment required will be less in proportion when it is compared to a loan for a used vehicle. This is because the LTV ratio for pre-owned cars is lower which makes the down payment ratio higher.
EMIs: Just as in the case of down payment EMIs for pre-owned vehicles are higher in proportion to the loan amount due to shorter loan duration. For new cars the loan tenure is longer which gives the borrower a longer time to repay them and the installments are thus lower.
Which One to Choose?
The decision to choose the type of loan depends on the individual’s personal choice and various circumstances. Thus factors like the choice of car, how much installment one can afford each month, how much one has saved for the down payment.
Advantages of New Car Loan
Advantages of Pre-Owned Car Loan
Lower interest rates
Depreciation is lower
Special discounts are available
Amount required to buy a car is lesser.
The table above compares both types of loans. Another factor that must be kept in mind is the credit rating. Credit rating play a more important part for used car loans and thus getting a loan for low CIBIL score when buying a pre-owned vehicle will be difficult. Thus when making a decision about buying a car, do factor in all these factors.
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