Buying a used car? How to get the right loan

Mumbai: In April, Pune-based Parth Shukla, 30, bought a used Volkswagen Jetta 2012 model for ₹ 8.5 lakh. A new Volkswagen Jetta costs between ₹ 14 lakh and ₹ 25 lakh. “I wanted to buy a car in the range of ₹ 8 lakh- ₹ 10 lakh. I took a used car loan from ICICI Bank Ltd at 10.99% interest rate for a tenure of four years,” said Shukla, a mechanical engineer.

Prior to buying the car, Shukla had rented self-drive cars. He believes driving 8-10 km is not enough to assess a car’s condition. Before zeroing in on Jetta, he shortlisted 8-10 cars, including Mahindra XUV500 and Renault Duster.

Checklist

If you plan to buy a used car, look for one that fulfils your needs. A case in point could be Mumbai-based Mohit Dubey, chief executive officer and founder of Chalo and former CEO of Carwale, who bought a BMW for ₹ 45 lakh, ₹ 8 lakh to ₹ 10 lakh less than the actual price, three years ago. The car had covered 6,000 km.

It is important that you check the condition of the car, registration date and miles covered. Ensure the spare parts are available and it gets after-sales service. Talking to a car dealer is a good idea. Check the car’s dealer service record in service book to get an idea of whether the car is damaged or poorly maintained. “Buying a car from a reputable or trusted dealer means you are not buying a car that has been tampered with,” said Mumbai-based Imran Khan, 38, who works as supervisor at an oil rig in KG Basin field, and bought a Hyundai i20 Asta 2013 model that had travelled 46,000 km for ₹ 3 lakh in May. Currently, the cost of the new model is ₹ 9.5 lakh.

You need to check the colour, under body, breaker bumps, engine rust and condition of the engine bracket. If there is a difference in the colour, don’t buy the car as it means it was damaged.

Interest rate

The interest rate on used car loans is higher than that for new cars. It ranges between 10.50% and 18% an annum, depending on how old the car is. You can use online aggregators to compare used car loans. Usually, banks lend up to 80-85% of the value of the amount. However, there are financial institutions that offer a higher loan-to-value ratio.

Don’t forget to ask about foreclosure charges, part-prepayment charges, stamp duty, processing fee and other administrative costs. For instance, most banks don’t allow you to foreclose a loan within six months.

To allow a foreclosure, the banks charge up to 6% of the outstanding amount, depending on the duration. The processing charges are usually 1-2% of the loan amount or a flat fee. So don’t just look at the interest rate. Factor in other costs as well.

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Step-by-step guide to take a used car loan

STEP 1: CHECK THE INTEREST RATE

Do your research. Don’t opt for a loan from a bank just because you have a banking relationship there. Shop around by comparing interest rates across banks and non-banking finance companies.

STEP 2: DO THE MATH

Besides the interest rate, calculate your equated monthly instalment and other charges such as processing fee and other administrative costs.

STEP 3: DON’T OVERINDULGE

If you can’t afford the loan and think it is going to affect your monthly budget, evaluate your plan.