How to Get a Loan For a Pre-Owned Car?
Moneylife Digital Team 08 February 2021
Yes. You heard it right. You can easily get a loan to buy a pre-owned or second-hand vehicle of your choice. 
 
Such loans are provided at attractive interest rates and have a repayment tenure of up to five years. Some lenders provide loans of up to 100% of the car’s quoted value. You can also get a used car loan with a co-applicant.
 
There is no need for security or collateral required for a used car loan because the car acts as security. The insurance costs and depreciation rates are lower when compared to a new car.
 
Here is how to get a loan to buy a pre-owned car.
 
1) Check on lenders, research on rates/ tenure and compare options
 
First check whether the lender offers loans for pre-owned cars. If yes, the used car you plan to purchase must be eligible for financing by the lender. Some lenders do not finance used cars older than three years. 
 
Visit a lender, either online (via lenders' website) or offline, to apply for the pre-owned car loan. Some online research will help you get the best possible interest rate. You need to compare deals across lenders on a wide range of pre-owned cars. Some lenders require the borrower to pay 20% to 30% down of the cost and borrow the rest from them. 
 
2) Zero in on the pre-owned car loan and finalise it: 
 
Once you shortlist the lenders, get details such as the amount you are eligible for and the tenure you want, the rate of interest and processing fee charged and calculate your equated monthly instalment (EMIs). Check with the lender about prepayment charges. Many lenders charge a penalty in case of foreclosure of loans. Some banks offer flexible repayment terms.
 
It is important to note that interest rates on pre-owned cars are usually higher with a  lower loan-to-value (LTV) ratio than a new car loan. The amount of loan you can get also depends on the valuation of the car arrived at by the lender. Often, the loan amount can be significantly lower than the price at which you plan to buy the car. While the loan tenure of pre-owned car loans can go up to five years, the actual tenure sanctioned by lenders depends on how old the car is.
 
Your eligibility for a pre-owned car loan will be higher if the LTV ratio is lower. Your chances of getting better terms on your loan will also be enhanced if the LTV ratio is low and you could negotiate with the lender for a longer tenure; however, in such a case you may have to make a higher down payment while buying the car.
 
Loan Amount: Most lenders lend up to 70%-90% of the used car's valuation arrived at through their own valuation process or based on the insured declared value (IDV). If the valuation is significantly lower than the purchase price of the car, your have to contribute the rest of the purchase price. Suppose you plan to purchase a second-hand car for Rs 4 lakh, and a lender  values your car at Rs 3 lakh and is willing to lend  70% that value, then you will only get a loan of Rs 2.10 lakh (70% of Rs 3 lakh) and will have to finance the remaining Rs 1.90 lakh yourself. 
 
Interest Rate:  Interest rates vary  from lender to lender and also depend on credit profile, age of car, loan amount and tenure. E.g.  ICICI Bank offers used car loan at 10.20% to 17. 51%, SBI (State Bank of India) offers used car loans at 9.90% to 10.90%, Axis Bank offers the same at 14.80% to16.80%
 
3) Apply for a pre-owned car loan - online or offline and submit documents
 
The process to apply for the loan is usually simple and can be completed online. Minimum paperwork needs to be submitted. Alternatively you can visit the branch and submit documents physically.
 
4) Take possession of your car
 
Once the lender approves the loan, the seller will receive the money in his/her bank account within a few hours. You can pay your down payment to the seller at the same time and take the possession of the pre-owned car.
 
Eligibility Criteria
 
The eligibility criteria that must be met for salaried employees and self-employed individuals will vary and are mentioned below:
 
Salaried Employees
 
  • Age Limit: 21-65 years
  • Income: At least Rs 15,000 per month
  • Income Status: You must be working in the current organisation for at least a year
 
Self-employed Individuals
 
  • Age Limit: 25-65 years
  • Income: Must make a profit of at least Rs.1.5 lakh in a year
  • Income Status: Must be in the same line of business for at least 3 years
 
Documents Required
 
The list of documents to be submitted when applying for a pre-owned car loan is mentioned below:
 
  • Application form
  • Passport-size photographs
  • Car valuation report
 
Identity Proof: Any of the below-mentioned documents can be submitted as proof of identity:
 
  • Aadhaar Card
  • Passport
  • Driving License
  • Voter’s ID
  • PAN Card
 
Address Proof: Any of the below-mentioned documents can be submitted as proof of address:
 
  • Voter’s ID
  • LIC Policy
  • Electricity Bill
  • Aadhaar Card
  • Driving License
  • Ration Card
  • Passport
 
Income Proof: The following documents can be submitted as proof of income:
 
  • Profit and loss account
  • Balance sheet
  • Audit sheet
  • Form 16
  • Salary slip
  • Bank statements
 
Here are a few important points to keep in mind for pre-owned car buyers:
 
1) Check that all original documents are in place. If lender's hypothecation (when an asset is pledged as collateral to secure a loan) is mentioned in Car Registration Certificate (Car RC) then the seller is required to repay the loan amount, get No Objection Certificate (NOC) from his banker and share the NOC with you. 
 
2) Also, check whether any e-challan is pending against the seller and ensure it is paid before completing the purchase. 
 
3) In case, you are buying an inter-state, make sure the seller arranges a NOC from the state of registration office so that you can complete registration in your home state after the purchase.
 
4) Be very meticulous about completing the transfer process immediately after buying the car.
 
It is a good idea to check if you are eligible for lower  interest rate and features of a personal loan. If you have a good credit profile of the loan applicant, it is possible you can get a better rate on a personal loan and use the money to buy a pre-owned car. 
 
This can happen because your personal loan eligibility is not dependent not on the valuation of the car. Both personal loans and used car loans offer maximum tenure of up to 5 years. 
 
On the other hand, since lenders do not give much value to credit scores while processing used car loans, borrowers with a poor credit score may find it easier to avail of used car loans.
Personal loans are generally sanctioned and disbursed within 2-5 days of  application, while disbursal of a used car loan usually takes at least a week.
 
The tenure of used car loans may depend on the age and condition of that car. E.g. HDFC Bank offers a maximum loan tenure of up to 5 years for used car loan but there is a rider that the loan needs to be repaid within 10 years of original invoice. So, if you finance a 7-year old car through HDFC Bank, you will have complete loan repayment within 3 years. But if you opt for a personal loan from the HDFC bank to finance that used car, you could get 5 years to repay the loan, irrespective of the age and condition of that car.
 
Many people with existing home loans avail top-up loans from their home loan lenders to purchase a pre-owned car. Interest on top-up home is likely be the same as their home loans. The loan tenures can go up to 15 years depending on the residual tenure of their home loan. 
 
The pre-owned car market is 1.2x of the annual sales volume of new cars, however only 15% of used cars sold, are financed by loans as compared to 65% for purchase of new cars. 
 
For borrowers who are eligible for better rates on personal loans, it is advisable to consider both options and choose what is best for you. 
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