Did You Know | Interest rate on loans for used cars is higher, while the loan amount is lower

Did You Know | Interest rate on loans for used cars is higher, while the loan amount is lower

When do you plan to buy a used car? Probably when you are on a tight budget to fund a car for yourself. However, when making a decision, remember that the interest rate charged on a loan taken for a used car loan is higher than on a loan taken for a new car. Moreover, the loan amount sanctioned is less in case of used cars as compared with the amount sanctioned on new cars.

The interest rate

Amount of loan

Usually, for a new car loan, you would get up to 90% of the car value as loan. Some lenders even give 100% of the car value. For instance, HDFC Bank Ltd offers 100% finance for a new car loan, subject to certain conditions. As far as a used car loan goes, you will get a smaller amount as loan, usually 70-85% of the cost of the car. For instance, HDFC Bank lets you borrow 80% of the value of a used car.

In other words, you will have to shell out a higher amount as down payment when taking a loan for a used car.

Loan duration

Most lenders offer a loan tenor of five years for new cars; a few even extend the tenor to seven years. If you take a used car loan, only some lenders would give a tenor of five years, most prefer a tenor of three years. Duration of a used car loan depends on the lender’s internal policy, the condition of the used car as well as the age of the car. Usually, lenders have a condition that the age of the car at the time of loan maturity should not cross 10 years, subject to maximum loan tenor of five years.

What should you do?

Though a used car may be cheaper than a new car, don’t just look at the amount you pay for the car, but also take into account the total cost of the loan. Let’s say, your budget for a car is 3 lakh and you have to choose between a new car or a used car.

The total cost of the loan for a new car will be 3,95,880 at an interest rate of 11.50% per annum over five years. For a used car, the total cost of loan would shoot up to 4,52,160 assuming the interest rate is 17.50% per annum. This comparison is applicable only if the amount of loan is the same in both a new and a used car. Of course, for the same amount, you could get a better version or a better model of a used car. The point here is that you must take into account the total cost of loan, when making a car purchase.