Car Loan Options: Types of car loan in India, used car loan vs new car loan

If you are planning to purchase a car of your own but do not have enough funds, banks and financial institutions let you borrow funds at an interest. Be it a brand new hatchback or a second-hand sedan, you can purchase the car of your dream with the help of the right car loan.

There are three kinds of car loans available in the market: New Car Loan, Used Car Loan and a Loan against Car. A New Car Loan, as the name suggests, is granted to a person purchasing a brand new car straight from the showroom. New car loans are available at interest rates varying from 8 to 15 per cent per annum.

Banks and lenders also offer Used Car Loans to people planning to buy a second-hand or a used car at a slightly higher rate of interest. Loans against pre-owned cars are available for preowned cars  which are not older than five years.

In cases of emergency, you can pledge your old car as collateral for a bank loan to buy a new car. This is known as Loan against Car.

 

New Car Loan

As explained earlier, if you are planning to purchase a brand new car from a showroom, you are eligible for a New Car Loan from a bank or lender. If you are eyeing a brand new car but do not have sufficient funds in your pocket to make the purchase, banks or lenders will come to your rescue.

The banks or lenders will help you bridge the gap in your funds for making the purchase. In return you will have to pay the borrowed amount back to bank or the lender with interest over a set period of time. A variety of car loans are available in the market for you to choose from.

The interest rates offered by each bank and lender will be different. The rate of interests will also differ based on the period in which you want to repay the loan. Usually the rates of interests are between 8 to 15 per cent and payable  in up to eight years.

Used Car Loan

If you have set your eye on a preowned car and want to purchase it, banks and financial institutions will help you make the purchase. With Used Car Loan, you may get up to 90 percent of the car’s valuation as loan. Funding is available for purchase of cars which are not older than five years

The rate of interest charged on purchase of preowned cars is slightly higher than loan on new cars. Banks and lenders charge anywhere between 8 to 16 percent per annum for Used Car Loans. You can repay the loan within a period of up to eight years. At the time of maturity of the loan, the car must be younger than 10 years.

Loan against Car

You can avail quick funds at a time of need using a loan against your car. If you are eligible for such a loan, the loan amount is transferred to your account almost instantly. What you are doing is turning your existing car a collateral to gather funds to purchase a new car or for an emergency.

These loans against car are available in banks and financial institutions across the country. Loans are available up to Rs10 lakh or 100 per cent of the value of the car. The rate of interest on such loans is considerably higher than other car loans. Banks charge an interest of 14 to 15 per cent per annum.

Who is eligible for a car loan?

Every bank and financial institution offering car loans has a different set of eligibility criteria. However, there are a few rules that apply across board. To apply for a car loan you have to be at least 18 years old.

Banks also have a maximum age limit criteria. If you are a salaried employee, you can apply for a car loan until you are 60 years old. If you are self-employed or run a business, you can apply for a car loan up to 65 years. To be eligible to apply for a car loan, you must earn at least Rs10,000 a month.

Financiers and banks seek stability in the applicant and hence ask for a present address where you have stayed for at least a year. You should also have a designated parking space for the car at your place of residence. You can apply for loans for a car of an approved make by an approved manufacturer.

You also need a good credit score to be eligible to apply for a car loan. If you have a credit score of above 750, you are eligible for a car loan by banks and financiers.

What are the features of a Car Loan?

Banks and financial institutions provide financial help to individuals planning to buy cars. Each bank and financial institution has different features in the loans they offer.

Here are some of the basic features of a Car Loan:

Loan Amount- The amount of your loan will vary from bank to bank, depending on your credit score and eligibility. It also depends on how much down payment you are able to pay. Usually banks offers up to 85 to 100 per cent of the on-road or ex-showroom prices of the car.

Loan tenure- You can choose to pay back your loan within a year or anytime within eight years. The shorter the tenure, the higher will be EMI to be paid by you every month.

EMI- This is the Equal Monthly Instalments that you have to pay to the bank for the tenure for which you have taken the loan. This is inclusive of your balance amount, interest charged, and processing fee. Almost all banks and financial institutions offer free EMI calculator options wherein you can estimate your EMI if you take a loan.

Interest Rate- This is the interest you pay on the principal amount that you have borrowed. The interest rates vary from bank to bank. Usually the interest rate is anywhere between 8 to 16 per cent per annum, depending on the kind of loan you have taken. The interest rates are also different for new car loans and used car loans as well as loans against cars. Compare the interest rates properly before choosing your loan.

Processing fee- Every bank charges a nominal fee as processing fee for processing your loan application. It is usually a small percentage of the principal amount. In some cases, banks may waiver this processing fee.

Preclosure- Banks allow you to close your loan account before your tenure period is over. This facility is available only when you have paid 12 EMIs on time. You can pay the full outstanding an close your loan account after paying a penalty charged by the bank for early closure called the preclosure fee.

Prepayment- Banks also allow you to pay a large part of your outstanding in one go after you have paid 12 EMIs. This, too, will attract a penalty by the bank called the prepayment fee.

New Car Loan vs Used Car Loan

There is a lot of difference between a New Car Loan and a Used Car Loan. Banks make different offers on both these loans. Here we tell you the basic differences between a New Car Loan and a Used Car Loan.

Purpose The New Car Loan is available to anybody planning to buy an unused car directly from the showroom. On the other hand the Used Car Loan provides financial assistance to anybody planning to buy a second-hand car.

Interest rates The interest rates offered by banks and financial institutions for New Car Loans and Used Car Loans are different. While the interest rate of a New Car Loan ranges from 9 to 14 per cent, the interest rate for Used Car Loans is slightly higher and ranges from 12 to 18 per cent per annum.

Risk factor Most banks and lenders find that giving out a loan on a brand new car is less risky than that on a used car. This risk factor drives up the interest rates for Used Car Loans.

Loan amount The loan amount for brand new cars is much higher than that for used cars. This is because the ex-showroom or on-road rice of the new car is much higher than a used car. In case of a New Car Loan, you may get as much as 85 to 100 per cent of the ex-showroom price of the car. In case of used cars, the loan amount is between 70 to 80 percent of the price.

Tenure New Car Loans are available for longer durations, meaning the loan can be paid back over a longer duration of time. However, in case of a Used Car Loan, the tenure is anywhere between three to five years only.

EMI The EMIs to be paid for a used car loan is much higher than the EMIs to be paid for a new car. This is because the new car loans can be repaid over longer tenures but the old car loans have to be repaid sooner.

Downpayment You have to pay higher amount as down payment for Used Car Loans. It is comparatively lower for New Car Loans.

Insurance The insurance cost of a used car is higher than that for a new car.

FAQs

How can I apply for a car loan?

You can apply for a car online directly through the bank’s website. You may use a third-party website where you compare the loans offered by different banks and apply through the third-party website. You will need to submit your income proof which could be in the form of three months’ salary slip, IT returns and bank statements. You will also be required to submit an age proof, identity proof and address proof. Your application will be sent to the bank. The bank will verify the details and then approve or disapprove your request.

How long does it take for a bank to accept a car loan application?

As part of your application you need to submit income proof, age proof, identity proof and address proof. The bank will verify your details and check if you are eligible for the loan. If approved, the loan amount is instantly transferred to the applicant’s account.

How to decide which car to buy?

Buying a car is an important decision. Before you set out to buy a car, understand your needs. You should buy a car based on your needs. Is it for routine trips to work, is it for making long trips on vacations, is the car for dropping your children at school? Based on your need, you can choose a car that is within your budget and is applicable for a loan.