Buying a used car during COVID times? Be aware of the paperwork on loans and insurance covers

As India slowly emerges from the lockdown, those commuting to offices may feel reluctant to take public transport, which in any case is not easily available these days. According to a survey done by CARS24 among 3250 people, 62 per cent of the respondents said that they would prefer to use a private car in the post COVID-19 period. Interestingly, 50 percent of the respondents said that they will be purchase used cars once the lockdown is completely lifted. Says Ruchit Agarwal, Co-founder and CFO of CARS24, “People are planning to invest their hard-earned money much more wisely post the COVID-19 pandemic and are keener to buy a used car instead of a new one for daily commute.”

A used-car comes with its set of complications. Let’s dwell on each factor to make sure your ride is smooth.

Rates higher on loans for used cars

Interest rates on used-car loans are generally higher compared to those on new car loans. For instance, ICICI bank charges 14.25 per cent a year on used car loans and 9.30 per cent for new car loans. That’s because the risks to the lender in case the car needs to be taken into possession for non-payment of dues are higher. “There is no clarity about the engine’s condition; you never know the number of accidents that may have happened with the used car,” says Abhinav Kaul, Vice President-Strategic Partnerships, BankBazaar. The new car comes with the manufacturer’s guarantee.

Agarwal says that the banks also have to incur additional cost for evaluating old cars before sanctioning the loan. This cost is passed on to the borrower in the form of processing fees or higher interest rate to borrowers.

Check for unpaid loans

Once you zero-in on your choice, check if there are any unpaid loans attached to it. If there is an on-going loan, insist on a recent loan statement from the bank. This tells you how much is due. Consider a case of a Rs 3 lakh car, with a Rs 2 lakh loan still unpaid. Agarwal suggests paying the loan amount to the bank and the balance sum to the car seller.

This works better than giving away entire Rs 3 lakh to the seller, who might not pay off the loan to the bank, which may land you in trouble later.

Other important documents you need to verify include the registration certificate (RC), invoice of car purchase, service book, insurance documents, form 29 (notice of transfer of car ownership), form 30 (application for the intimation and transfer of car ownership), forms 32 and 35 (which are needed when the seller has taken a loan to purchase the car). Most banks don’t finance used cars that have been sold more than thrice.

Get insurance cover

You may require the equivalent coverage for a used car as that for a brand new one. Decide on the insurance coverage, including on third-party and comprehensive policies.

Existing insurance policy can be continued while purchasing a used-car. As a buyer, you must make sure that the insurance policy is transferred in your name within 14 days of purchase. Gaurav Gupta, Co-founder and CEO of MyLoanCare.in says, “Verify whether the no-claim bonus (NCB) benefit has also been transferred to the existing insurance policy.” No-claim bonus is a benefit for not making a claim. This helps in reducing the insurance premium of your car. The discount starts from 20 percent and goes up to 50 percent.

After first 14 days of the vehicle’s registration, if the insurance policy is not transferred, any accident claim for damages to the vehicle or third party will not be paid by the insurance company.

Avoid taking longer tenure loans

Firms such as HDFC bank offer loans on used cars for long tenures, of up to seven years. You should prefer short tenure for car loans if you can afford the EMIs. While a shorter tenure leads to a higher EMI, it also results in lower interest costs. Kaul says that the age of the car too matters while deciding the loan tenure.

The average lifespan of a car running on petrol is usually considered to be 15 years by the lender. This is because, after fifteen years, the regional transport office (RTO) doesn’t allow you to hypothecate your car for a loan. Most banks refuse funding for cars older than 8-10 years.