Types of Car Loans in India | Difference Between New and Used Car Loan

October 6, 2021 Mutual Fund

A car is the second biggest purchase which most of the people would love to make after a house, as it has become an important part of our lifestyle. We spend a lot of time and money researching the best cars within our budget. However, most people choose to go a little out of the budget when it comes to buying a new car because it is an asset which they usually buy only once or twice in their lifetime. That is why financing a car by taking a car loan is a very common practice worldwide now a days.

By selecting the right car loan, you can buy the car of your dream even if you do not have sufficient amount in your pocket. So, as per the policies, a bank or Non-Banking Financial Company (NBFC) will provide you finance at the time of your purchase and you will have to repay the loan amount over a period of time as per the agreement made.

There are mainly three types of car loans available in India:

1. New Car Loan:

In today’s economy, people have the option to choose from a wide range of products as per their preference. And, a car isn’t an exception to it. There are so many brands of cars available in the market, offering a variety of models, designs and features. A new car loan is offered when you purchase a brand new car from a showroom which is generally offered on most car brands and models. The rate of interest for a new car loan will be different from lender to lender. Moreover, it also depends upon the car model and loan tenure you choose. However, the interest on new car loan generally ranges between 9% p.a. to 15% p.a., while you can choose the new car loan tenure from 1 year to 8 years as per your convenience and the lender’s policy. Although most banks and NBFCs offer up to 85% to 90% of the ex-showroom price of the car loan amount, some banks and NBFCs have started offering new car loans up to 100% of the ex-showroom price of the car.

2. Used Car Loan:

Many people consider that buying a used car is the best option as you may get a less used car in an excellent condition at a substantially lower price compared to the new car of the same model. There are many online and offline car dealers that can help you get a used car in good condition at a fair price. But, it is also possible that you do not have a budget to afford even the discounted price. Or, since you are buying a used car you might decide to go for a model that would otherwise be out of your budget and therefore, a Used Car Loan can help you in such a case. Most banks and NBFCs offer a Used Car Loan up to 85% of the price you pay for the car. However, the rate of interest charged on this loan is comparatively higher than a new car loan. It generally ranges between 12% p.a. to 18% p.a.

3. Commercial Vehicle Loan:

If you are running a business that requires vehicles, you will have to avail of a Commercial Vehicle Loan. You cannot avail of a new car loan as it is meant for individuals. Most leading banks and NBFCs offer Commercial Vehicle Loans to business entities, such as self-employed individuals, partnership firms, companies, trusts, schools, hospitals, etc. You may avail of this loan in the name of your business to purchase buses, trucks, tankers, cars, or any other vehicle that needs to be used for business purposes. Furthermore, you can get a commercial loan for new as well as used vehicles. Typically, a new commercial vehicle loan is offered up to 100% of the ex-showroom price of the vehicle. Whereas, a used commercial vehicle loan is offered up to 90% of the price of the vehicle.

4. Loan Against Car:

Loan Against Car is a top-up loan that you can avail of over your existing car loan by pledging your car as collateral to the lender. Many banks and NBFCs offer it on a pre-approved basis. So, you can apply for a Loan Against Car through online and get the money instantly credited to your bank account. There is no restriction on the usage of the amount. Hence, you can use the loan amount for any personal or business purposes, such as child’s education or wedding, medical emergency, expansion of business, etc. Moreover, the rate of interest is lower compared to the personal loan as the Loan Against Car is backed up by security. Many lenders offer Loan Against Car up to 90% of the value of the car.

New Car Loan v/s Used Car Loan:

Loan Amount:

As discussed most banks and NBFCs offer a new car loan up to 85% to 100% of the ex-showroom price. Whereas, a used car loan offers up to 70% to 85% of the car value. Furthermore, the prices of the new cars are higher than the used cars. Hence, undoubtedly, you get the maximum loan amount when you opt for a new car loan.

Rate of Interest:

Since reselling value of a new car is higher than the used car, all the lenders consider it less risky to provide a new car loan. This ultimately leads to a lower interest rate offered on new car loans compared to the used car loans.

Loan Tenure:

As we have already discussed, one can choose the loan tenure of a new car loan from 1 year to 8 years as per his/her convenience. However, a loan tenure offered for a used car is limited to a minimum of 3 years to a maximum of 5 years.

Down Payment:

The banks and NBFCs consider a used car loan a little riskier than a new car loan, as used car loans usually require more down payment compared to new car loans.

Car Insurance:

The premium of a new car will be lesser than the used car as the possibility of a new car owner claiming car insurance is lower.

To Conclude:

There are many types of car loans offered by banks and NBFCs in India. Before choosing any car, it is advisable to check and understand the different types of car loans and consider the additional cost that you might have to pay depending on the type of car loan you avail. Moreover, make sure you do proper research before finalising the lender by comparing the rate of interest, loan tenure, processing fees, convenience, etc., which will help you make an informed decision.

This article first appeared on PersonalFN here