Owning a car is still an aspiration for most Indians. While for many individuals a car is just a better way to commute to their workplace or take their family for an outing, for many others, it is still considered to be a status symbol. According to the National Family Health Survey (2019-21), the total percentage of households in India that own a car is just 7.5%. While this proportion is growing (it was 6% in 2018), it still shows that owning a car is a relative rarity in India compared to developed countries.
Banks and non-banking finance companies (NBFCs) have made owning a car much easier for a large chunk of middle and upper-middle-class Indians. These lending institutions offer loans with attractive features aimed at simplifying car ownership. Attractive interest rate, flexible repayment tenure, high loan amount (as % of the cost of the car), easy digital process and quick disbursals are some of the factors that are contributing to the growing car ownership in India. Moreover, owning a car need not always mean buying a new car. Owning a used or second-hand or pre-owned car is an option which is increasingly gaining traction in India.
For an individual planning to purchase a new or a pre-owned car, there are several loan providers operating in the market. A car loan is meant to facilitate a new car purchase while a pre-owned car loan makes buying a second-hand car easier. While both these products are aimed at facilitating car purchases, there are several differences between these products. It is important to understand both loan types to make an informed decision.
What is a New Car Loan?
A car loan (also called a car loan or an automobile loan) is a loan offered by a lender to the borrower for the purchase of a new car. It is a secured loan with the vehicle acting as a tangible collateral. The borrower pays back the lender in the form of equated monthly installments (EMIs) at a predetermined rate of interest and a pre-decided tenure. Apart from the EMI, there are also some fees and taxes that are levied by lenders. One needs to read the fine print carefully to be fully aware of the charges that at times may not be very apparent.
What is a Used Car Loan (Pre-Owned Car Loan)?
A pre-owned car loan is also called a used car loan or a second-hand car loan. It is also a secured loan, but in this case it allows the borrower to purchase a pre-owned (used or second-hand) car. Similar to the loan for a new car, a pre-owned car loan is repaid by the borrower in the form of EMIs at a predetermined rate and tenure. The loan amount approved by the lender depends on the age of the car, physical condition, overall health and working parameters of the car apart from a host of other features specific to the borrower. Like in the case of a car loan, one needs to read the fine print carefully so that there are no (hidden) charges that can give a surprise later.
Difference between New Car Loan and Used Car Loan
While their underlying asset remains the same (car), car loans and pre-owned car loans differ on quite a few parameters. Let us examine some of them.
1. Condition of the underlying vehicle
A car loan is taken for the purchase of a new car; hence the buyer is assured of the “newness” of the vehicle. The vehicle is dispatched from the factory to the warehouse and later to the dealer showroom and hence is in a crisp, unused condition with all the features working perfectly fine.
On the other hand, a pre-owned car loan is taken for the purchase of a used car. Hence, it is very important to check the condition of the car that one intends to buy. There could be some features that might not be as efficient as in a new car. The buyer needs to be aware of these so that there are no unpleasant surprises later. In recent times, a lot of organized players have entered this segment. They perform numerous checks on the vehicle before they buy it from the previous owner and sell it to a new buyer. The cost of the used car is determined by the age of the vehicle, physical condition, state of the engine and components, etc.
2. Rate of interest
The rate of interest for a pre-owned car loan is slightly higher than a car loan. This is because a pre-owned car purchase is riskier owing to the reasons mentioned above. Car loans in India are currently available at interest rates starting from 7% per annum, while pre-owned car loans start from 10% per annum. The interest rates are subject to change as per prevailing conditions.
3. Loan tenure
A car loan generally has a maximum tenure of seven years. On the other hand, deciding the tenure for a pre-owned car loan is slightly tricky. This is because the value and utility of a car decrease with the addition of years of usage. Typically, the tenure for a pre-owned car loan is not more than five years. Given the limited residual life of a pre-owned car, it is in the best interest of the borrower to either go in for a pre-owned car loan with a low tenure or pay off the loan before the actual tenure.
4. Loan approval process
The approval for a pre-owned car loan takes longer than the loan for a new car. This is because in the former case, the lender does a thorough check-up of the car. If the pre-owned car is being bought from an unorganized player, the time taken for disbursal is slightly more. In case the pre-owned car is being bought from an organized player the time taken for disbursal could be lesser. This is because the organized players perform a thorough examination of the vehicle before buying it from the initial owner. Hence, the time spent by the lender in assessing the vehicle is lesser.
5. Loan-to-value ratio
Loan-To-Value (LTV) ratio implies the amount of loan disbursed as a proportion of the value of the car. The LTV for a Pre-Owned Car Loan is slightly lower than that for a car Loan, due to the inherent risks involved. LTV for a new car loan could go as high as 100% while for a Pre-Owned Car Loan it is generally up to 80-90% of the value of the car.
Despite these differences, there exist some commonalities between these two loan types. Firstly, the borrower needs to do a detailed research to find the right lender. Secondly, lenders prefer borrowers with high credit scores (preferably above 750). Most importantly, borrowers need to be disciplined with the loan repayment so that there is no adverse impact on their credit score.
Bottom Line
The surge in financing options, e-commerce marketplaces of used-cars and borrower-friendly policies of lenders have boosted car purchases in recent times. Along with new car loans, pre-owned car loans have emerged as an alternative option for those wanting to commit a lower amount towards a car purchase. The onus lies on the borrower to make the right choice in deciding the type of car (new or used) and lender.
