You recently learnt driving in a driving school and want to purchase a car. But you are still not sure of your driving skills. And it hurts to even see a minor dent on a new car. You decide to go for a pre-owned or a second hand car. By the way, your lack of confidence in your driving skills is not the only reason to go for a second hand car. You may be buying for business purpose and a pre-owned car fits the bill and is a much cheaper alternative. Affordability is always a criterion.
Editor’s Note: Given that a new car has massive upfront depreciation, buying a slightly used car almost always makes financial sense. Even when you can afford a new car, avoid buying a depreciating asset to boost your ego or social status, if a pre-owned car could address your functional needs.
There is one problem. You know that you can take a loan to purchase a new car. You are not sure if you can get a bank loan for a pre-owned car. There is no cause for worry. You can get loan for a second-hand or a pre-owned car too. In this post, I will consider such loan plans from two prominent banks (HDFC Bank and SBI) and discuss various terms and conditions.
- You can borrow up to 80% of the value of the car. Do note this is depreciated value of the car. Clearly the loan eligibility of the 2014 model of the car will be much higher than 2011 model of the car.
- Age of car at the time of loan maturity should not exceed 10 years.
- Maximum tenor of 60 months
- Pre-payment penalty ranges from 3%-6% of the outstanding principal.
- Processing fee: 2% of the loan amount
- Interest rate varies from 14.5% to 17.5% depending upon the segment and age of the vehicle.
For instance, if the car that you are planning to purchase is 7 years old, the maximum loan tenor will only be 36 months (and not 60 months).
- For salaried employees, age must be between 21 and 60. Annual income should exceed Rs 1 lac. And you must have a telephone at your residence. Salaried employee includes salaried doctors, CAs and employees of select public and private companies. And you must have work experience of two years and at least 1 year with the current company.
- For self-employed, age must be between 25 and 65. You must be in business for at least 3 years have an annual income of Rs 60,000. And yes, have a landline phone at office.
You can find more about pre-owned car loans on HDFC Bank website.
State Bank of India
- You get loan for up to 85% of the on-road price. Margin of Rs 25,000 for registration, insurance and cost of accessories.
- Loan offered for vehicle NOT more than 5 years old
- Repayment tenure of up to 7 years.
- Pre-payment penalty of 2%.
- Processing fee: 0.51% of the loan amount
- Interest rate is 4.65% above 1 year MCLR.
- Age shall be between 21 and 65.
- Minimum annual income of Rs 3 lacs for salaried employee and Rs 4 lacs for self-employed. Self-employed applicant must be an income tax assessee.
For detailed terms and conditions, you can go to SBI website.
Points to Note
- Banks typically promise the world on their websites. Your actual experience may be way different. For instance, banks may have various unwritten rules about the age of the car. Or the maximum eligible age of the car as mentioned on the website may only be for select models.
- Your car segment, model, manufacturer may affect your loan eligibility.
- Banks may ask for additional security.
- Many banks and NBFCs offer loans for pre-owned cars. Rates for banks are likely to be lower than NBFCs.
- The loan amount does not only depend on the model, make and year of manufacture of the car. When it comes to loan, your repayment ability cannot be ignored. Your credit score might also be considered.
- There can be various unwritten rules, which you will find out once you approach the bank. Hence, be prepared for a few surprises.
Interest Rate for Pre-Owned Car Loans
Interest rate for pre-owned cars is much higher than the rate for new cars. As per information displayed on SBI website, loan for new cars is available at 1.25% above 1 year MCLR. On the other hand, the loan for old car is available at 4.65% above 1 year MCLR. That is a premium of 3.4%. for used car loan. Hence, be prepared to shell out more interest if you are planning to go for a pre-owned car.
How Does the Process Go?
Once you have shortlisted the car and made the application, the bank sends its valuator to determine the value of the car. Subsequently, the bank takes a final call on the loan amount. So, the actual loan amount can be quite different from what you expected.
Going for a second hand car may not always be a question of choice. It may actually be a prudent choice given your requirement and the state of your finances. As for all kinds of loans, do shop out a bit. Check with a few institutions (I am not talking about applying) before you finalize. You can try out our car loan calculator to get an idea about affordability. You can also try out used car loan section on BankBazaar to check out options available.