How To Finance A Used Car: A Quick Guide

Add Co-applicant:

Just as much the pandemic situation has confined us to our homes, it has made owning a car a necessity for families as well as individuals. It will take us a while before we feel fully confident to hop on a bus for a long ride to work or take a train to visit elderly parents back in our hometown. In such times, having a car of your own gives you a sense of safety and freedom in meeting your daily commuting needs. However, a need-driven purchase does not mean you have to compromise on your dream car. The second-hand car market is booming and the used car finance options will spoil you for choices. In this article, we will talk about some of the most popular used car financing options.
 

Things To Consider When Buying A Used Car

Before discussing used car financing options available in the market, let us first look at the important factors to consider when purchasing a second-hand car.
 

Car's History

Before you finalise the lender for used car finance, make sure you have sufficient information regarding the second-hand car from the current owner itself. Check for the car's claim history, service records, and other information.
 

Car's Registration Certificate

When buying a car on a second-hand car loan, make sure you know the genuine owner of the car. Check the car's registration certificate to see if it was purchased from a legitimate owner or if it was stolen. Check the PUC, road tax payment invoice, and other documents, in addition to the RC.
 

Check Car Insurance

Before taking a used car loan to buy a car, make sure you verify the car's insurance paper for validity. Insurance papers will help you in finding out if the car has been involved in accidents or if there have been any insurance concerns.
 

Car's Mileage

With the ever-rising fuel prices, you must conduct a test drive of the car to determine its mileage. You may also divide the odometer's number by the car's age to determine if the car you are planning to buy through used car finance has high or low mileage.
 

Car's Condition

The condition of a used car is rated as okay, good and excellent. A car earns a good value if it looks good, is well taken care of and has neat interiors with a clean engine bay.
 

Year of Manufacturing

The year of manufacturing, along with other factors, determines the car’s depreciation. Cars aged on paper are considered aged irrespective of the odometer readings. Despite limited use on the road, a car is considered almost scrap if it has about two to three years of life left as per its fitness certificate.
 

Odometer Reading

Although cars have a 15-year fitness certificate, they are rated well if less used on the road.
 

Fuel Type

Since diesel engines have a longer life than petrol engines, cars fuelled by diesel earn better value as compared to the ones fuelled by petrol.
 
Now that you are aware of the various things to consider while choosing a second-hand car, it's time to talk about the various financing choices available for a used car purchase.
 

Various Options for Financing Your Used Car

 

1. Used-car Loan with or without Down Payment

   Purchasing used cars with zero down payment means you do not have to make an upfront down payment to buy the car. Here, the financial institution will fund the full value of the car. However, you must pay the processing fee. If you opt for a used car loan with a down payment over a zero downpayment used car loan, you will have to pay a lower second-hand car loan interest rate and also lower EMIs. 
   
   The factors considered by a financial institution before granting a used car loan are:
    
   • The car's total value
   • Your credit history
   • Your net monthly income and the number of years you have worked for
   
   Note that the lender considers insurance, road tax, depreciation over the number of years used, and state registration expenses while arriving at the car's value. Your credit history is crucial because it would help the financing company to gauge the risks involved in granting you the second-hand car loan with or without a zero down payment option. Check your current credit score before applying for this financing option.
   The used-car loan may not cover the full value of the car. 



2. Personal Loan

   Financial institutions can come to your rescue and grant you a personal loan if you have a good credit score. The primary benefit of a personal loan is the speedy approval and disbursement process, easy documentation and the fact that it is unsecured. You need not mortgage any asset with the financial institution to secure the loan. Furthermore, the lender would never question your intent formally. On disbursal, you can utilise a personal loan to fund the purchase of a used car without taking formal consent from the lender. Check online for a second-hand car loan calculator to estimate the monthly amount you must put aside to repay the personal loan. It is important to repay the personal loan on time to avoid late payment penalties and accumulated interest.



3. Buy-Here, Pay-Here Financing

   If you have a poor credit history, the buy-here, pay-here financing option is ideal for you. This type of used car finance option is offered by reputed used-car dealers who have in-house financing services. Here, the used car dealer is in charge of both financing and selling the vehicle. However, this financing option comes with a high used car loan interest rate and does not assist you in building your credit history.
    

 

 

How to Get Used Car Loan at Low-interest Rate?

To obtain used car finance at a lower interest rate, follow the tried and tested method mentioned below: 
 

Improve your credit score

The higher the score, the better are your chances of availing of used-car finance at competitive rates. A good credit score helps you win the trust of used-car finance providers and convince them that granting you a used car loan is not risky. You can improve your credit score by paying your EMIs on time and clearing your previous loan defaults. 
 

Know your EMI

Use an online second-hand car loan calculator to calculate EMI and compare interest rates offered by various financial institutions and choose your repayment tenure wisely. Arriving at the optimal used-car loan amount becomes easier if you know the amount of EMI and the repayment tenure you are comfortable with. A used car loan calculator can also help you in deciding if you should take a loan with a longer-term and lower EMI or with a shorter term and higher EMI. However, you must keep in mind that a longer-term loan equates to a greater interest component and vice versa.
 
Grab pre-approved used-car finance offered by the financial institution of your choice so that you get a competitive interest rate and affordable repayment tenure. Learn about the processing fees, foreclosure penalties, and service tax associated with the pre-approved offer in advance.
 
Also Read: A Quick Guide on Pre-Owned Car Financing
 

Add Co-applicant:

If your income falls short of the lender's qualifying standards or if you have a bad credit history, consider adding a co-applicant to your used car loan application. Adding a co-applicant with a good credit history and steady income not only increases your loan approval chances but also helps you get a lower used car loan interest rate. This is because the lender considers both your and your co-applicant’s income when analysing your application.

To Conclude

It's always a proud moment to get behind the wheel of your own vehicle. If you are on a limited budget and cannot afford a new car, consider buying a used car. Nowadays, with so many financing options available in the market, getting funds for a used car is as simple as it can get. Furthermore, the interest rate on used car finance is relatively low.
 
Disclaimer: This post was first published on 25th March 2021 and has been updated for the latest information, freshness and accuracy.