How do used car loans differ from new car loans?

How do used car loans differ from new car loans

As the purchasing power of Indians rises, people living in Tier 2 and Tier 3 cities in India, too, are looking to improve their overall lifestyle. An estimated 75% of the population in these cities is looking to finance their new and used car purchases through car loans. Car loans have two broad categories – used car and new car loans. Several individuals choose used car loans in India to finance the purchase of a used vehicle, while several others opt for a new car loan to purchase a new one. Assessing the differences between these two types of loans can help borrowers decide which one to choose while buying a car in India today.

How do used car loans differ from new car loans?

  1. Lenders offer potentially higher interest rates through used car loans: 

A crucial distinction between used car and new car loans is the interest rate offered by banks and NBFC (Non-banking Financial Companies). Lenders carefully consider the perceived high risk of financing a pre-owned vehicle and charge higher interest rates from borrowers who apply for used car loans. Borrowers applying for used car loans must prepare for slightly higher interest rates. 

  1. Used car loans have a shorter loan tenure: 

New car loans have a longer repayment period compared to used car loans. Another distinguishing feature of used car loans is the shorter loan tenure. Borrowers can pay their used car loans within two to five years. The shorter tenure can be both an advantage and a limitation. Since used car loans have shorter loan tenures, their repayment cycles often have higher monthly instalments.

  1. Lenders may offer lower loan amounts through used car loans since the market value of used cars is low: 

Cars depreciate in value as they age, and lenders consider this depreciation while deciding on loan amounts for their used car loans. Borrowers must know that the amount they receive through a used car loan might not help them purchase a car, since used cars generally have a lower market value as compared to new ones. Borrowers might need to arrange a higher downpayment to complement a used car loan amount to pay for their used car’s purchase.

  1. New car loans have a longer loan tenure, ranging between three and seven years: 

New car loans, in contrast, come with a more extended loan tenure. Borrowers can choose repayment periods ranging from three to seven years. The flexibility in tenure options can be advantageous, as it allows individuals to tailor the loan to their financial capabilities and preferences. Used car loan EMI calculators can help borrowers estimate the monthly EMI they will need to pay, based on the loan amount, interest rate, and repayment tenure. This can help them budget for their car purchase and make informed decisions about their loan.

  1. New car loans offer higher loan amounts when compared to used car loans: 

When purchasing a new car, borrowers can secure higher loan amounts. Lenders are generally more willing to finance a new vehicle’s full purchase price, minus the down payment. Used car loans offer higher interest rates, shorter tenures, and lower loan amounts due to the lower market value of pre-owned vehicles. 

New car loans, conversely, offer more extended tenures and provide access to higher loan amounts to accommodate the cost of a brand-new vehicle. Borrowers must assess the interest rate and repayment cycle of a car loan before signing up for one. They must also consult a car loan EMI calculator to plan for their future payments in advance. 

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