When you apply for a car loan, it could be used to purchase a new or used car. In general, we usually hear of car loans being used for the purchase of a new car. However, banks and other financial institutions also give loans for the purchase of used cars (or second-hand cars, as they are sometimes referred to) but the criteria and terms for such loans can be a little different.
What should I keep in mind when I apply for a used car loan?
Interest rates: When you apply for a loan to buy a used car, the interest rates generally tend to be higher. This is because the car you are buying has already depreciated in value and its value as collateral continues to drop over the tenure of the loan. Banks, therefore, try to recover their money faster by charging a higher interest rate on the loan amount.
Tenure: Similarly, when you apply for a used car loan, the tenure might be shorter than for a regular auto loan. This is because the bank wants to be repaid quickly as the condition of the vehicle deteriorates and it ends up being a worthless asset if the loan period stretches too long.
Type of car: Typically, lenders give used car loans for luxury or high-end cars that remain in good condition after use. This is in comparison with cheaper cars that might be virtually worthless after a few years. In case the customer defaults, the lenders would prefer a good used car which they can dispose of to recover their dues. They may not be able to recover their money with a cheaper, poorly-maintained vehicle.
Loan to Value (LTV) ratio: The LTV ratio is the amount you borrow as a proportion of the value of the purchase. For example, if the cost of the car is Rs 1 lakh, and you take a loan for Rs 60,000, then the LTV is 60%. Generally, lenders will offer a lower LTV for used car loans in order to reduce their risk in case of customer default.
When to apply for a used car loan
You stand a better chance of being approved if you apply for a small loan amount (low LTV) and plan to buy a good quality, luxury car brand. Keep in mind that, in general, it is difficult to be get a loan approved for a regular, mass market, used car which will quickly depreciate in value and be of little use to the lender as collateral.