Do you desperately need to buy a car but do not have the finances to do so? Well, you can always opt for a loan to buy used cars. A lot of companies have started finance schemes for selling their used cars better. Many people who need to buy a cheap car but cannot afford to do so take up these loans. If you do need financial assistance when you are buying cars, you may take up a loan. However, you must know that the loan for a used car charges higher interest than loan for a brand new car. For example, if you have to pay an interest of 12 percent on a brand new car, then you would have to pay around 15 percent for a used car of the same make and manufacturer. Even though it seems strange, there are quite a few pieces of logic that are applicable here.
1. Financiers are unaware of the true price a used car
When you buy a new car, its value depreciates by almost 50 percent when it rolls out on the road. Judging your drivability, the cost of the car, make and manufacturer, the financier would be able to calculate the true price that your car would command five to seven years later. Therefore, they would know exactly how much they would be able to recover in case you default on your loan and they have to tow your car away to auction and repay the loan.
However, when it comes to used cars, the depreciation value cannot be calculated clearly because the wear and tear on the car cannot be clearly calculated in case of old cars. Therefore, financing companies cannot clearly gauge how much they would earn from selling your old car. In the event of you defaulting on your loan, they would not be able to recover enough money to pay off their loans. Hence, to offset their losses partially, they lend money for old cars at a higher rate of interest.
2. Credit History of Buyers
Bankers usually believe that those people buying used cars with loans would not have good credit history and hence they charge higher loan interests in order to discourage them from taking loans. Moreover, higher interest safeguards them against defaulting habits of customers with low credit scores.
3. Bankers want you to buy new cars
Since most of the financing for used cars are offered by banks rather than the car manufacturers themselves, banks elevate the interest payable on loans for used cars so that buyers opt to buy new cars. New cars are a safer investment for banks and hence banks encourage buyers to take loans for buying new cars
There are however exceptions to this rule especially when buyers opt to buy used luxury cars. Most buyers opting for used luxury cars are C segment car users who want to upgrade to luxury cars. They are judged to be safe customers who have good credit history. The loan rates for luxury used cars are around 11 percent which is almost 4 percent lower than that of used affordable cars. Therefore, those buyers with a budget of Rs 15 to Rs 20 lakhs should opt for a used luxury car instead of a premium sedan of the same price because the drive experience would not be the same for both.
If you are thinking of opting for finance for used cars, then you should prepare at least 6 months before taking out your loan.
Monitoring your credit score
Keep a check on your CIBIL score because it determines the rate of interest payable on your loan for used cars. A score above 75 is considered to be a good one and hence you should aim to have your score above this benchmark. By checking your credit score regularly, you will be able to determine whether everything is in order and in any case of discrepancy, you can contact your bank and get it rectified.
To elevate your credit score, you should have very few uncovered or unsecured loans and more of secured loans. For example, personal loans and credit card loans are considered to be unsecure ones and hence you should pay them off as soon as possible. On the other hand, a house loan or a scooter loan is a secured one and hence it is a sign of good credit. Maintaining the balance of your credit history is the key here. If you believe that by not using your credit card at all, you would be able to have a higher credit score, then you will be mistaken. Non usage of credit card shows that you are too scared of taking on loans and hence cannot handle the pressure of a car loan.
However, do not buy too much of stuffs on your credit card as it would indicate that you are too spendthrift and have little control over your finances. Optimally you should spend less than 60 percent of the credit limit you set to your card. Also, do not let the outstanding loan on your credit card to be rolled over. A lot of credit card companies allow you to pay a part of your loan and then transfer the rest to the next month. This only increases the amount outstanding in your name and it will increase the rate of interest on your outstanding loan and also spoil your credit score.
Once you have secured a loan for used cars, don’t hesitate to log into an online car trading website where you can find good quality second hand cars in the city. You can enter your budget specification along with the model that you want to buy, the fuel variant and the year of manufacture. The website would show you the best options available for your budget. You can directly contact the seller and talk to him or her regarding the sale of the car.