Better ways to fund that second-hand car

As state governments gradually lift the lockdown, many office goers would want to avoid public transport and prefer to commute in their private vehicles. Many of these buyers would prefer second-hand cars due to budget constraints and because they may use the vehicle only until the threat of covid-19 looms large. According to a study by online classifieds portal OLX, of the people planning to buy a car in the next three to six months, 54% would prefer a pre-owned vehicle. The study, which the company undertook between April and July, covered over 3,800 respondents.

But financing a used car purchase is difficult. The interest rates are higher (by 3-7%) than what lenders offer on new cars, and each lender looks at different parameters. “Interest rates for used-car loans are generally higher compared with loans for new cars. For lenders, the risk is higher with a used car. It’s difficult for them to ascertain the history of a pre-owned vehicle,” said Abhinav Kaul, vice-president, strategic partnerships, BankBazaar, an online financial marketplace. We look at options to finance an used car and cheaper alternatives to a pre-owned car loan.

RISING DEMAND

The market for pre-owned cars is 1.2 times the size of the new car market, based on the number of vehicles sold, according to pre-owned cars platform Spinny. “Organized used car dealers are growing at 19% year-on-year. Also, the number of women inquiring about second-hand cars has gone up 400% with us,” said Niraj Singh, CEO and founder, Spinny.

More buyers are looking for a used car, as many are facing cash flow problems due to the pandemic. “There is economic uncertainty. While buyers want a car, they have limited budget. That’s why many are opting for a used car,” said Singh.

There is also demand from those who had a car in the family but commuted via public transport. Now each working family member wants a separate vehicle.

USED CAR LOANS ARE COSTLY

Though used cars may fit into your budget, financing them may be a bit costly.

The State Bank of India offers new car loans starting at 7.7% per annum. But its used car loan rates start at 9.2%, according to Paisabazaar.com. HDFC Bank offers new car loans between 8.8% and 10%, and used car loans start at 13.75% and go up to 16%. Other lenders, too, have similar difference between the two loans. Axis Bank offers new car loans at 8.95-11.2% and used car loans at 14.7-16.7%. Federal Bank’s loan for a pre-owned car is 14.05% and for a new one is 8.75%.

This is because used cars are seen as risky as there is no clarity on their condition, past accidents, the engine’s state and so on. Also, there is no warranty available on a used car, unlike a new one.

Factors such as the model and age of the car also matter. “The average lifespan of a car is usually considered to be 15 years. Most banks may not fund a car older than 8-10 years. Also, if you buy a five-year-old car, your loan tenure will not be more than three to five years. Further, most banks don’t finance more than three resales,” said Kaul.

In used car loans, chances of full loan recovery are lower if a person defaults. “Second-hand vehicles have a lower resale value. In the case of default, if the lender takes possession and auctions the car, there are always chances that it may not be able to recover the entire loan amount,” said Naveen Kukreja, CEO and co-founder, Paisabazaar.com, an online marketplace for financial products.

There could be other complications as well in used cars. The existing owner could have an outstanding car loan. In this case, the seller will need to first close the existing loan, avail a no-objection certificate from the lender, get the hypothecation removed from the registration certificate (RC) and get a new RC book without the hypothecation, before selling it. All this could be time-consuming. The new lender will not give a loan until this process has been completed.

OTHER OPTIONS

A lender, typically, provides loans up to 60-80% of the used car value versus 85-100% of the on-road price of new cars. “The loan to value ratio depends on the model, age and condition of the car. Borrowers should be prepared for contributing up to 50% of the car’s value as loan margin,” said Kukreja.

If you are getting a high-interest rate and not the desired loan amount, you can look for alternatives. The first option is to take a top-up loan if you have an ongoing home loan. The interest rates on top-up home loans are far cheaper, and the procedure is simpler compared with getting a loan for a used car. You could also fund the entire value. The loan tenure, in this case, would be longer. Keep in mind that the longer the tenor, the higher will be the interest outgo. But you can always prepay to escape the extra interest burden.

The second option is to go for a personal loan. The interest rates on a personal loan can vary. A borrower with a high credit score may get one below 15%. Consider it if the rates are at least 1.5% lower than the rate for the used car loan.

Third, many platforms dealing in pre-owned vehicles have also tied up with lenders. They offer a used car loan at a cheaper cost. Spinny, for example, offers used car loans at 12.5% from its partners. “Companies that sell second-hand cars, evaluate and certify them. Lenders, therefore, have comfort lending through them. As their risk is reduced, they are willing to give out loans at cheaper rates in partnership with such platforms,” said Singh.

Public sector banks (PSBs) offer used car loan at competitive rates, but they offer it mostly to their existing customers. If you can’t get a loan from a PSB, go for alternative options.