Higher interest rates, limited tenures drive used-car loan EMIs up

Consider top-up home loan and personal loan; they are cheaper and you could get 100% financing

Bajaj Finance recently collaborated with Cars24, an e-commerce platform for pre-owned vehicles, to offer used-car financing. Several banks and non-banking financial companies are already active in this space.

India’s used-car market was valued at $27 billion in 2020 and is expected to reach $50 billion, registering a compound annual growth rate of 15 per cent between 2021 and 2026, according to market research firm Mordor Intelligence. However, pre-owned car loan is still a nascent segment.

“Consumer finance penetration in the Indian used-car industry stands at only 15 per cent,” says Anup Saha, deputy chief executive officer (CEO), Bajaj Finance.

Buyers opting for a used-car loan need to get clarity on several issues. Vijay Deshwal, group CEO, Poonawalla Fincorp, says, “Borrowers need to understand the eligibility criteria, the loan amount they are likely to get, the repayment tenor, interest rate, processing fee, and equated monthly instalment. Knowing their credit bureau score could come in handy in getting an optimal loan rate.”

According to Gaurav Aggarwal, senior director, PaisaBazaar, “Factors like the model, age, and condition of the used car influence the loan amount, tenor, and approval of the loan.”  

Interest rate, valuation, and tenor

Lenders usually charge a higher interest rate on used-car loans than on new car loans.

Adhil Shetty, CEO, BankBazaar, says, “The risk is higher in a used car. Financiers regard the borrower’s profile as slightly riskier. Also, very little of the vehicle’s history can be ascertained.”

New vehicles, on the other hand, come with the manufacturer’s guarantee on the vehicle and parts.

Lenders usually lend only up to 70-90 per cent of a used car’s valuation. Moreover, they have their own methods of valuing a pre-owned car. The valuation fixed by the lender could be lower than the price being paid by the buyer.

Loan tenor poses another challenge. A car’s average lifespan is considered to be 15 years. Most lenders don’t fund a car older than eight to 10 years. The loan tenor is also not allowed to exceed this span.

“If you are buying a five-year-old car, your loan tenor will not be more than three-five years," says Shetty.

Buy from a legit player  

If you buy from an established player in the used-car market, you’re likely to get a loan more easily. A loan may be harder to get if you are buying from a neighbour. It is easier for lenders to evaluate a car being sold by an established player.

Avoid purchasing a second-hand car against which there is already an outstanding loan. Also, avoid taking a loan being offered by the dealer (who would have a tie-up with a financier), as he gets a 1-2 per cent commission on the loan.

Consider alternatives

A few alternative loan options are available.

“Take a personal loan where you will get an amount based on your eligibility, which could finance the entire purchase price,” says Aggarwal.

The interest rate is usually lower than on a used-car loan.

Existing home loan borrowers have another avenue. They could avail of a top-up home loan. This could be the cheapest credit option for financing a pre-owned car.

Who should go for it

Those who want a premium vehicle but don’t have the requisite amount may consider buying a second-hand car.

“It will allow you to buy a premium vehicle without stretching your finances too much,” says Shetty.

Segment C and D sedans, for instance, lose as much as 40 per cent of their value in the first year.

Existing two-wheeler owners who wish to upgrade to a four-wheeler may also consider a pre-owned car. “Small business owners looking at their car doubling up as a mode of self-commute and helping in commercial use can buy a pre-owned car,” says Deshwal.

Those who wish to own a car for more than five-seven years will be better off avoiding a used car.