Auto loan may not always be the best option

Borrowers should explore personal loan or loan against securities

The pre-owned car market in India is 1.2 times of the new car business. That is, more used cars are sold than new cars every year.

Despite this, only 36,500 pre-owned cars are financed monthly as compared to 190,000 new vehicles, according to Indian Blue Book – a vehicle pricing website by Mahindra First Choice Wheels.

The reason: While a new car only involves credit risk on the borrower, lending for a used car is more complicated. “A financier has to come up with its value of the car based on its age, model and kilometres clocked, and how the fourwheeler was used,” said Namit Jain, business head – used car finance, CarDekho. If a car is used as a taxi and clocked higher kilometres, it will be priced lower than a similar car used personally.

Apart from this, when a lender is giving loan for a pre-owned car, it is funding a vehicle that is in the name of the previous owner. It can take anywhere between 45 days and 180 days for the car’s registration certificate is endorsed in the name of the new buyer by a regional transport office. It can be even trickier if the seller has an ongoing loan on the car. Used car loans are, therefore, expensive by 3-7 per cent compared to new car loans.

A new car loan from State Bank of India is between 9.2 per cent and 12.35 per cent. The interest rates on pre-owned cars are 12.9 per cent. Axis Bank gives new car loans starting at 9.25 per cent and charges an interest of 15-17 per cent for used vehicles. Most private lenders charge over 14 per cent interest rate on new vehicles.

The average ticket size for a pre-owned car is ~300,000. If an individual takes a loan of this amount for four years at 17 per cent interest, he ends up paying ~115,513 as interest cost. If he buys a new car and for the same loan amount and tenure, the interest outgo will be ~60,056 at an interest rate of

9.25 per cent.

As the lender goes beyond the borrower’s credit profile in used car loans, even someone with better credit score can end up paying 15-18 per cent interest on a used car loan. Instead of going for a used car loan, for some borrowers opting for a personal loan can be cheaper, easier and convenient.

“If the personal loan is at the same interest rate or there’s a difference of 1-1.5 per cent, go for it. But taking a top-up on existing home loan would be even better as the rates would be the lowest among all options,” said Naveen Kukreja, CEO and cofounder, Paisabazaar.com.

The interest rates on a personal loan range from 11 per cent to 24 per cent. Most lenders finance up to 70-80 per cent of the value of the vehicle that they put on the car. So, you could be paying ~400,000. But if the lender thinks the car value is ~300,000, the loan disbursed will be 70-90 per cent of this value. It means that buyers will get around ~240,000 if the loan-to-value ratio is 80 per cent. In a personal loan, it’s the buyer’s choice to decide on the loan amount.

Most lenders say that they offer loans up to five years. But the age and condition of the used vehicle determine the tenure and, usually, the loans are given out for three years. Most lenders allow a five-year tenure for personal loans. For a home loan top-up, it can be even higher.