How to choose between a used car loan and a personal loan

Generally, people buy used cars for two reasons. Either they have a tight budget or they want to use it to refine their driving skills before buying a new car. In case of the former, the buyer is more likely to take a used car loan.

Used car loans are slightly different from the usual car loans taken for buying new cars. Unlike new car loans, the loan amount in used cars loans depends on the age, model and condition of the car. The interest rates on used card loans are also generally higher by 3 per cent–5 per cent, almost equaling personal loans rates on the lower side. Thus, many use personal loans to finance their used-car purchase. 

Here are some factors that you should keep in mind while choosing between personal loans and used car loans.

Interest rate: Interest rates of used car loans range from 14% to 18% while those for personal loans range between 11% and 24%. For example, the interest rate on personal loans from Axis Bank ranges from 11.49% to 20% whereas interest rates for used-car loans start from 15%. The interest rates on your personal loan will be largely determined by your credit score, employer, income and your loan amount. Therefore, it is quite possible that if you have a good credit score and/or a high salary with a reputed employer, personal loans may prove to be a cheaper option than used car loans.

Lending institution	Used Car Loan	Personal Loan
Axis Bank	14.5–16.25 per cent	11.99 –24 per cent
HDFC Bank	14.50–17.50 per cent	11.29 –20 per cent
ICICI Bank	15.50 per cent	11.49 –22 per cent

Loan Amount: Generally, lenders lend up to 70%–90% of used car’s valuation. For example, ICICI Bank finances up to 80% of the car value. The lenders have their own method of valuing a car and this may be lower than what you paid for the car. For example, if your used car is priced at  Rs.4 lakh and its value was fixed at Rs.3 lakh by your lender, your loan amount can only go up to Rs 2.4 lakh (i.e. 80% of Rs 3 lakh). The rest Rs 1.6 lakh has to be paid from your own pocket. However, if you opt for a personal loan, you can take a personal loan of Rs 4 lakh  (subject to your income and profile) and use the entire proceeds to pay off your car purchase without burdening your own finances.

Loan tenure: The loan tenure of used car loans usually goes up to 5 years. However, the tenure may also depend on the age and condition of that car. For example, HDFC Bank requires you to repay your used-car loan within 10 years of the original purchase date of that car, subject to a maximum of 5 year tenure.  So, if you purchase a 6 year old car, you will have 4 years to repay the loan. In case of personal loans from the same lender, you have the option of repaying it back by 5 years irrespective of the car’s age and condition.

Credit score: While personal loans may seem a better option than loans for used cars on several parameters, the balance tilts in favour of used car loans if your credit score is poor. Personal Loan being an unsecured loan, the approval of personal loan will also depend on your credit profile.  As used car loans are secured loans, chances of loan approval are higher than personal loans, especially for applicants with a poor credit score.

Loan approval process:  Being an unsecured loan, the loan approval process of personal loans is much simpler and faster than used car loans. This can be especially cumbersome if you purchase used car from unorganized players in the used car segment.

To sum it up, both used car loans and personal loans and have their own merits and demerits. As a consumer, you should evaluate both options before taking a call on which option works out better for you in terms of approval chances, process, pricing and terms.

By Gaurav Aggarwal - Vice-President, Paisabazaar.com