How to fund a used car purchase- car loan or personal loan?

Naveen KukrejaPaisaBazaar.comI recently overheard a conversation between two people regarding how to finance the purchase of a second-hand car. The question stayed with me and got me to think on two aspects— when do people buy a second-hand car and how do they finance it. In this article I will attempt to answer most of the questions that many people have regarding the financing aspect.People buy second-hand cars mainly for two reasons—either they have a constrained budget or they want to refine their driving skills in a used car before buying a new car. In the former case, the buyer is more likely to finance his car through loan. Loan amount and approval in case of used cars are subject to the age, model and condition of the car (unlike new car loans). Moreover, interest rates are also generally 3%–5% higher than new car loans. This makes used car loans almost as costly as personal loans. Now, while most lenders may lend up to 100% of the new car value, in the case of second-hand cars, the loan amount will be 70%–90% of the car value. In such a scenario, deciding between a used car loan and a personal loan can be a tough job.Let’s find out which one will work better for a second-hand car purchase — a used car loan or a personal loan?1.Interest rate: For used car loans, interest rates range from 15% to 18% while for personal loans they range between 11% and 24%.For example, the rate of interest charged by ICICI Bank for personal loan ranges from 11.49% to 20% whereas it levies 15.5% for used-car loans. Therefore, it is quite possible that in some cases, personal loans will work out as a cheaper option than used car loans.

2.Amount of loan: Usually, lenders finance up to 70%–90% of the value of the second-hand car. For example, HDFC Bank allows you to borrow up to 80% of the car value.The loan value depends on the value of the car fixed by the lender, which can be lower than the price paid by you. So, if the price of the used car is Rs.4 lakh and the lender valued it at Rs.3 lakh, you can avail a loan of up to Rs 2.4 lakh (80% of Rs 3 lakh).The differential amount of Rs.1.6 lakh, including down payment of Rs.60000, have to be borne by you. Whereas, if you opt for a personal loan of Rs.4 lakh, you can use the loan proceeds to pay off the entire cost of the car without spending anything from your own pocket. 3.Loan duration: In the case of car loans for second-hand cars, banks and other lenders offer loan tenure of up to 5 years. However, age and condition of the second-hand car also influence the tenure of the loan. For example, State Bank of India will require you to repay“certified used-car loan” within 8 years of the first purchase of the vehicle. So, if you purchase a 5-year old car, the maximum tenure will be 3 years. However, if you take a personal loan from SBI to finance your second-hand car, the loan tenure can go up to 5 years. Where used car loans outscore personal loans for car purchasePersonal loans seem to be a better option than used car loans at first glance. However, the balance will tilt in favour of the latter if you have a poor credit score. As personal loans are unsecured loans, your credit score will play a major role in the loan approval process and setting the interest rate.Your low credit score can also translate into higher rate of interest on personal loans, possibly nullifying its interest advantage. On the other hand, used car loans are secured loans where the used car would serve as security. So, if you have a poor credit score, it might be that the interest on used car loans would be lower than what is being offered through personal loans. The probability of loan approval will also be higher in case of used car loans.Both personal loans and used car loans have their own advantages and disadvantages. Opt for the former if you are looking for a higher loan amount at a lower interest rate. Opt for a used car loan if you have low credit score.