Difference between new and used car loans!

By BankBazaar | September 25, 2012

It is interesting to note that as per statistics the number of used cars sold in India is more than the figures of new cars. The lure of owning a brand new shiny car for your family does tempt all of us while deciding on buying a four wheeler but there are certain factors which favor the purchase of a used car especially if one does not have the entire money and is planning to follow the car loan route. There advantages and disadvantages associated with both types of car loans which merit a detailed study before one takes a call on the car loan to be availed.

Considerations in a New Car Loan

 

The manufacturer’s warranty on the new piece relieves a great deal of headache one may have put in verifying the condition of a used car. A new car is obviously less troublesome and has the latest gadgets and features incorporated into it. However with all these benefits the new car does cost a lot more and has a higher rate of depreciation right from the moment it is driven out of the showroom. The insurance premium is accordingly higher in a new car.

The banks and financing institutions offering car loans prefer to disburse new car loans since the government polices are aimed at increasing sales of new cars. The total amount disbursed is more in case of a new car loan ranging around 90% of the cost of the vehicle. Some banks are even providing loans up to the ‘on road’ cost of the vehicle which reduces the burden on the customer. The repayment tenures of new car loans are typically 5 to 7 years which gets the EMIs in a tolerable range. But most importantly the new car loans come at a much lower rate of interest which is typically around 13-14%

Considerations in a Used Car Loan

 

The price of a used car is much lesser as compared to a new one which means that depreciation is lesser and insurance cost is also reduced. But the past record of accidents and problems can never be completely verifies and the associated maintenance problems of the used car is more.

While the total amount borrowed in a used car loan will be much lower than a new car loan there are a few issues which might actually make the loan more difficult to repay. Firstly the financers provide only 80% of the value of a used car as a loan. The rate of interest in case of a used car is significantly higher in the range of around 20%. Thus the net amount repaid will make this kind of a loan costlier in the long run though the amount borrowed may be lesser. Additionally most banks offer only a maximum of 36 months as repayment tenure on used car loans which implies a definitely higher EMI burden on the customer.

It can be safely concluded that while buying a used car may be a smart financial decision but availing a used car loan for the same purpose may not work out to be cheaper option in the long run.

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