Bag the Lowest Interest Rates on Used Car Loans: A First-Timer’s Guide

Pre-owned cars have become an attractive value proposition in the evolving used car market in India. Consumers are slowly recognising this, leading to a steady rise in used car loans. Just as exciting it is to be behind the wheel, balancing finances is tough. Nowadays, all major financial institutions offer used car loans, but how do you bag the best option—the one offering the lowest interest rate—without getting overwhelmed?

First, let us get the basics out of the way. Here are some factors that determine your interest rates for a car loan:

Credit History

Irrespective of the type of loan, a good credit score and spotless credit history helps you negotiate well with your lender. Think of it as positive leverage that helps you bag a lower interest rate. On the other hand, if you have a weak credit history, the financial institution will charge a higher interest rate for their own security. That is if your loan is sanctioned at all.

ncome ratio implies a higher repaying capacity. It shows that you are a reliable borrower, and are not at risk of loan defaults. If the lender feels confident in your repayment capability, it boosts your chances of receiving a lower interest rate.

Tenure

It is a simple formula—the longer the loan tenure, the lower is the interest rate and vice versa. However, the longer the tenure, the greater is the amount you pay towards interest cost. Therefore, it is better to opt for a shorter tenure and pay a slightly higher EMI as you save a lot on interest costs.

Age/Model of the Car

When you take a used car loan, your vehicle is seen as collateral and is hypothecated to the lender. Popular and relatively newer models have better chances of fetching an attractive interest rate.
 
Also Read: Fixed vs Floating Interest Rates for Used Car Loan

Used-Car Documents

The documentation of a pre-owned car is crucial in obtaining the lowest car loan interest rate in India. Financial institutions check the car paperwork to make sure the vehicle you are buying is not stolen and belongs to the original owner. Before finalising the used car, make sure the following documents are in order.

• Registration papers (RC) of the used car
• Pollution Under Control Certificate
• Insurance papers
• Service record book. It helps the lender in understanding the number of times the car has undergone repairs and maintenance. 

Now that you know the fundamentals behind the interest rate of used car loans, here are our strategies to help you get the best deal:

Compare Different Lenders

Buyers often make the mistake of agreeing to the first loan they are offered. Instead, you should take your time. Interest rates differ from lender to lender, and you should study different financial institutions, the nature of their used car loans, and even promotional offers and SMS campaigns. Pre-approved loans from your car dealer may not be the best option, and they might apply a mark-up on the interest rate.

Know Your Credit Score

Complete knowledge of your financial history is a must, so know where you stand with a credit rating check. The Reserve Bank of India lists credit information agencies that generate credit reports, and you can sign up to find your score. The higher you land on an agency’s scoring chart, the better your chances to bargain for low-interest rates.

Time the Application Right

Month-ends, half-yearly or year closing are the best time to enquire about loans. Financial institutions need to meet their targets and are likely to offer lower interest rates rather than lose you to competition. But that all depends on your creditworthiness.

Reduce the Loan Amount

It helps control your finances in the long run. Negotiate with the dealer on the price of the car, and clear off as much as you can in a down payment to reduce your total dues. The smaller the loan amount, the lower the interest charged.

Dealer Reputation

To obtain a lower car loan interest rate, choose your seller wisely. Compared to private individual sellers, lenders prefer authorised dealerships. When you buy from a certified dealer, you can get an extended warranty, a car that has been thoroughly checked and tested, and more.

Debt-to-income Ratio (DTI)

The debt-to-income ratio is another crucial aspect that helps in getting the reduced car loan interest rate. If you have spare cash or have received an unexpected performance bonus, use it to lower down your existing debt burden and better your debt-to-income ratio. Since in a second-hand car loan the lender hypothecates your car, a debt-to-income ratio of less than 50% can work in your favour. 
 
Also Read: Getting The Best Interest Rate On A Used Car Loan-Everything You Need To Know
 
A pre-owned car loan is a hefty commitment. We understand you cannot wait to cruise your dream car out of the showroom, but patience and foresight are the hallmarks of a wise borrower. Do your homework well, and explore multiple avenues for used car finance, before visiting your preferred car dealer.
 
Disclaimer: This post was first published on 17 April 2020 and has been updated for the latest information, freshness, and accuracy.