Used Car Loan Vs. Personal Loan: Which Is More Suitable For Buying Pre-owned Cars

By Author: Patanjali
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People usually prefer purchasing a pre-owned car either because of budgetary constraints or to perfect their driving skills with a used car before purchasing a new one. If they wish to buy a used car on credit, the first option that comes to their minds would be a used car loan.

However, the features of most used car loans are quite restrictive in nature, making them an inefficient instrument for purchasing pre-owned cars. Hence, prospective pre-owned car buyers should compare the used car features offered to them vis a vis other credit facilities like personal loan, top-up home loan (in case of existing home loan borrowers), etc. before making the final loan application.

Here is a comparison of features of both used car loans and personal loans:
Interest Rates
The interest rates offered for used car loans are generally higher than personal loan interest rates. For example, Axis Bank Personal Loan interest rates start from 10.75% p.a. while the same lender provides used car loan interest rates between 13.20% and 15.35% as mentioned on their website. The final personal loan interest ...
... rates offered to loan applicants usually depend on factors like their credit score, monthly income, occupation profile, employer’s profile (if employed), etc. while the used car loan interest rates usually depend on the age and model of the used car. Therefore, prospective used car buyers having good credit scores who satisfy the personal loan eligibility criteria set by their lenders have higher chances of availing personal loans at same or lower interest rates compared to used car loans.
Loan Approval Process
The loan approval process for used car loans is quite complex and time consuming. Lenders have to consider factors including the age and model of the vehicle, its past usage and total kilometres clocked while valuing the vehicle. Moreover, lenders also have to check the authenticity of the vehicle’s documents and scrutinise the insurance policies to check for previous accidents (if any) involving the vehicle. The entire process can take many days leading to longer turnaround time for loan disbursal. The loan processing may take longer if you purchase a pre-owned car from an unorganised player in the used car segment.

Being an unsecured loan, the loan sanction/approval process for personal loans is quicker and less complicated compared to used car loans. Most lenders disburse personal loans within 2-4 days of making the loan application. Many lenders also offer pre-approved instant personal loans to their select existing customers with near instant disbursal and minimal/nil documentation. Hence, those planning to buy used cars through loans should check with the banks & NBFCs with whom they already have existing deposit or lending relationship about their eligibility for pre-approved instant personal loans. Note, some lenders also offer digital onboarding process for personal loan applicants resulting in quicker disbursal than personal loans applied through offline mode.
Loan Amount
Lenders usually provide LTV ratios of up to 80% for used car loans with some lenders claiming to offer higher LTV ratios. LTV ratio is the total proportion of a car’s value that is financed by the lender through their used car loans. The buyer has to arrange for the remaining component from his/her own source in the form of down payment.

However, the LTV ratio does not depend on the used car’s purchase price decided between the buyer and seller. Instead, it is determined based on the pre-owned car’s value decided by the lender after factoring in the car’s age and model. Doing so increases the possibility of arriving at lower values than the purchase price paid for the pre-owned car, which in turn can lead to reduction in the final loan amount.

For example, if the purchase price of a used car is Rs 8 lakh and the lender arrives at a value of Rs 6 lakh through its valuation process, your loan amount would be Rs 4.8 lakh, assuming an LTV ratio of 80%. You will have to pay for the remaining component of your car’s price, i.e. Rs 3.2 lakh, from your own pocket. However, if you opt for a personal loan, you can take a loan of up to Rs 8 lakh depending on your income and repayment capacity. Thus, you can use the entire proceeds to pay for your car purchase without burdening your finances.
Loan Tenure
The loan tenure for used car loans usually go up to 5 years with some lenders offering up to 10 years for repayment of the entire loan. However, the loan tenure may also depend on factors like the used car’s age and condition. For example, a lender offering used car loans requires borrowers to repay the loan within 10 years of their vehicle’s original date of purchase, subject to maximum loan tenure of 5 years. Thus, if you buy a 7-year-old car, you will have to repay the loan within 3 years.

However, lenders usually offer personal loan tenures of up to 5 years with some of them going up to 7 years for loan repayment. Thus, individuals availing personal loans for financing their used car purchase can opt for loan tenures based on their repayment capacity, irrespective of the age and condition of their used car.
Credit Score
Although personal loans may seem a better option than pre-owned car loans for buying a second hand car, used car loans may be more suitable for loan applicants with poor credit scores. As personal loans are not backed by any security, lenders give greater importance to their loan applicants’ credit scores. Thus, individuals with credit scores below 750 are usually charged higher personal loan interest rates.

As used car loans are secured in nature, loan applicants with lower credit scores have higher chances of getting their loan approved at lower interest rates than personal loans.

Content Specialist who covers Personal Loan, Business Loan, Home Loan and other lending products.com. I am a former Journalist who has worked with Print Media Companies. I am a PG in Journalism and studied BA (Hons) English from Sri Venkateswara College (DU).