When it comes to acquiring a previously owned vehicle, financing emerges as a pivotal factor for countless buyers. While some prefer to utilise their savings to make an upfront payment, many others prefer to have a significant portion of the price financed by a lender. Thus, choosing a used car loan grants the opportunity to spread the cost over a specific duration, alleviating the financial strain.
Considering the used car financing market is poised to reach an impressive value of $13 billion with a CAGR of approximately 24% by 2027. Prospective buyers can expect a surge in the availability of used car loans, each offering varying interest rates starting as low as 9.95% per annum.
However, amidst the plethora of loan options, it is essential to consider several factors that can significantly influence the overall cost and terms of the loan before committing to an agreement.
Eligibility Criteria
Each lender sets unique eligibility criteria for used car loans, considering various factors. These include age, income, employment history, and credit score, all of which are carefully evaluated to determine the approval of loan applications, prospective borrowers must take note of this and review the specific requirements of different lenders to gauge their eligibility.
Typically, lenders lean towards applicants with high credit scores ranging from 600 to 900. Such individuals are considered less risky, increasing the likelihood of loan approval. However, credit scores are not the sole determining factor. Lenders also scrutinise the stability of income or employment—for instance, borrowers with a consistent monthly income of at least Rs. 10,000 are preferred as it ensures comfortable loan repayment.
Loan Amount
Choosing the perfect car can be exhilarating, but figuring out the right loan amount can quickly become daunting. Borrowers face the crucial task of carefully evaluating the loan sum based on multiple factors: the car's value, their repayment capacity, and the array of vehicle expenses, from insurance premiums to taxes.
Furthermore, borrowers must consider their other financial obligations to ensure loan repayments fit their budget. This way, they can dodge the pitfall of acquiring a loan that surpasses the car's actual worth, avoiding the unpleasant duo of negative equity and overwhelming financial strain if they prefer to sell the vehicle before clearing the debt.
A brilliant strategy for mitigating this risk involves making a down payment of at least 20% of the vehicle's on-road price during the booking process. By doing so, borrowers can reduce the loan amount and steer clear of negative equity.
Loan Tenure
Applicants must exercise caution when choosing the suitable loan tenure as it holds significant sway over their monthly instalment amount. It is crucial for individuals to thoroughly assess their monthly
income, expenses, and financial obligations to determine the highest monthly instalment they can comfortably handle. While opting for a longer tenure may appear enticing due to reduced monthly payments, it also means accruing more interest over time.
On the other hand, a shorter tenure might lead to higher monthly instalments but can potentially save a substantial amount on interest charges. To strike a balance, aiming for a loan tenure of nomore than four years is generally advisable.
Interest Rates
Interest rates exert substantial influence over the total expenditure of securing a used car loan. Opting for a lower interest rate translates into reduced interest payments throughout the loan's duration, potentially saving a significant sum. To make an informed decision, prospective borrowers should undertake meticulous research and diligently compare interest rates offered by various lenders.
Prepayment and Foreclosure Charges
Prepayment and foreclosure charges are potential stumbling blocks for borrowers aiming to settle their loans ahead of schedule. Although borrowers are advised to fulfil their loan commitments, unforeseen financial windfalls or life-altering circumstances may nudge them toward early loan repayment. Regrettably, fixed-rate car loans frequently come with hefty prepayment fees, climbing as high as 6% of the remaining loan balance.
Therefore, to navigate these potential obstacles, debtors must scrutinise the prepayment and foreclosure charges before embarking on a loan agreement.
The Bottom Line
Securing a loan that fits your financial needs and minimises long-term expenses requires a comprehensive approach that involves conducting thorough research, seeking professional advice, exploring multiple options, and negotiating with lenders to obtain the best possible terms and conditions.
By methodically evaluating these factors and comparing offerings from different lenders, loan seekers can find a loan that aligns with their financial situation and lowers long-term expenses.
Namit Jain is the Co-founder and CEO of Rupyy
