If you have been a regular viewer of television or a listener of radio, it is difficult for you to miss advertisements featuring used cars dealers, buyers and sellers, and the benefits you can reap.
A used car or a pre-owned car is that vehicle which is being sold for the second or the third time.
The used car market in India is booming. According to the reports, the ratio of new cars to used cars is 1:2.2, which means that for every 100 new cars sold, 220 used/pre-owned cars come into the market for sale. The annual volume in the used car market is estimated to be 4 million units, which is 50% more than new car sales.
While earlier, these deals mainly happened on references and word-of-mouth publicities; now there are many companies like Cars24, Droom, Maruti True Value, Mahindra First Choice, etc. who facilitate buying and selling of used cars.
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Reasons for The Growth in Used Car Market
Reducing ownership periods: With increasing disposable income, the periods of car ownership are reducing. The ownership periods earlier were around 7-8 years; however, it now stands at 4-5 years. So, there are more cars being sold in the used cars market.
Affordability of used cars: A car used for 2-3 years is available at around 60-70% of the on-road price of a new car. Better technologies employed in the manufacture of cars ensures that the car does not go down in quality even after use of 2-3 years. So, you can end up getting value for your money by going in for a used car too.
Better availability of platforms for buying and selling of used cars: There are a lot of options available for trade of used cars who offer added benefits like maintenance of the car, assurance of quality, warranty, financing and other added attractions like RC book transfer, etc. which makes the experience of buying a second-hand car much easier.
Changed perceptions: Buying a used car is no longer considered inferior with better players and added transparency in the market.
Ownership of more than one car in the household: With more individuals getting into the workforce and the public transportation still in the developing phase in many cities of the country, purchasing two cars is becoming a norm in many households. Individuals prefer buying used cars as the second car.
Increased ownership of cars due to cab services: Ola and Uber are no stranger companies to us. As more and more drivers are turning entrepreneurs, there is increased demand for cars and often used cars are preferred due to the cost factor.
Ease in the availability of finance: There are easier financing options available for used cars.
All that you should know about financing used cars
Types of Cars Financed: All types of used cars can be financed. However, lenders have their reservations when it comes to imported or very old cars. These are approved on a case-to-case basis
Availability of finance: Lots of financing options are available for used cars. Banks and other non-banking financial institutions cater to individuals looking to buy used cars. Many companies like Mahindra and Maruti who run their used car dealerships provide finance for the car from their associate finance companies like Mahindra Finance, Maruti Suzuki Finance, etc.
Also, there are companies like Cars24 who are C2B (Customer to Business) companies and promise instant transfer of the sale amount to the party selling used cars.
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Valuation of the Car: This is the toughest part of financing a used car. A brand-new car comes with a clear price tag, whereas estimating the value of a used car is not easy.
One would have to take into account the number of kilometers driven, the user profile (personal or commercial use), the place of usage (Cars from flood-prone areas may not be preferred), accidents or modifications done on the vehicle and clear title of the car, etc.
Loan to Value for Used Cars: Lenders expect a certain amount of the estimated value of the used car to be paid as down payment. Generally, lenders go by a loan to value percentage ranging from 65-80 %. However, certain lenders like Tata Capital do lend up to 95% of the estimated value of the used car.
Rate Of Interest On Used Car Loans
Purchase of a used car is fraught with risks both for the buyer and the lender due to reasons mentioned above. Therefore, interest rates on used car loans are a tad higher than the new cars.
Currently, used car loan rates range between 11-16% and depend on numerous factors. Whereas, new car loans rates start much lower at 7.75%. A processing fee is also charged and it ranges between 1-3% of the value of the car.
Tenures for Used Car Loan
Deciding loan tenures for used cars is also a tricky subject. The car might have already been used for some years. Tenures for used car loans also depend on the quality of the car. However, as these issues are subjective, most banks/financial institutions limit loan tenures on used car loans.
Some lenders limit used car tenures till a certain number of years from the date of first registration or lend only for used cars which are used for below a certain number of years. Generally, used car loans have lower tenures than a new car loan, which can go for as many as 7 years.
Moreover, as interest rates on used car loans are higher than the new cars loans, it may make sense for an individual to clear off the loan as soon as possible to reduce overall interest burden.
Importance of Credit Scores for Availing Used Car Loans
Used car loans are backed by an asset and the lenders try to compensate the risk involved in lending for these vehicles by charging a higher rate of interest. Hence, not much importance is attached to credit scores of the loan applicant.
So, it may be easier for individuals with low credit score/no credit score to avail used car loans. However, individuals with good credit score may score some bonus points and get to negotiate a better deal on interest rates.
Loan Approval Process
The loan approval process for a used car may take a little longer in comparison to a new car.
This process may be hastened when you avail finance from associated finance companies. For Ex: When you buy a car from companies like Mahindra First Choice and use their in-house finance company Mahindra Finance for finance, the process may be faster as they are themselves involved in valuation and verification of the car.
However, if you intend to buy a used car from a dealer belonging to the unorganized market, the lender may take time to do their due diligence before approving the loan, hence taking longer time for processing.
Additional Reading: Smart Tips for Saving on your Auto Loan
Checks before buying a used car
While buying a used car, we suggest you purchase from a reputed dealer who can assure you of the quality and would give you a warranty on the vehicle. You should also do a thorough due diligence of the vehicle from your end and not just rely on the dealer.
Increased financing options help an individual's ability to buy used cars at a lower cost. However, as with any other loans, we would like to reiterate that being responsible towards your credit matters the most. No matter a new car or a used one, always borrow as much as you can pay back and be regular with your repayments.