Getting a loan for a second-hand vehicle is much more difficult than for a new car.
A used car was sold for every new car sold in India in 2014, says a study by consultancy and market research firm Frost & Sulli van. With the average age of car buyers down to 25-27 years, the demand for second-hand cars is high. This age bracket earns well but not enough to own a flashy new set of wheels. Banks and NBFCs have been very active in this space, pushing loans for used cars. However, borrowing for a used car may not be simple. Here is why.
Lower loan-to-value
The loan-to-value (LTV) offered for second hand cars usually ranges between 60 and 75% of the on-road price of the vehicle. As opposed to this, LTV for a new car stands at up to 90% of the ex-showroom price or 85% of the on-road price. The minimum down payment for used cars is 15% of the car value.
For new cars, banks can fund even 100% of the ex-showroom price depending on the profile of the customer (existing, very old bank customer or a top corporate).
Once a buyer shortlists a used car, the bank or NBFC sends its valuation expert to evaluate the vehicle. The loan amount is sanctioned accordingly. The value determined may be different from the sale price of the car. At the same time, the lender may also consider the Insured Declared Value (IDV) of the car on the insurance document. Up to 85% of the lower of the two values is given as loan. Different banks may offer different LTV for the same model.
Shorter tenure, higher interest
Older the car, shorter is the loan tenure. The norm is that the car should not be older than 10 years at the time of loan closure. Most banks lend for a maximum of 5 years for used cars, though some NBFCs can stretch it to 7 years. The loan tenure for new cars is mostly 7 years.
The interest rates levied on loans for used cars are around 3-4% higher than for new cars. For instance, ICICI Bank charges 10.75% for new car loans, while for old car loans the interest can be as high as 17%. Similarly, Canara Bank and State Bank of India offer new car loans at roughly around 10.5%, but for used cars they charge 17.25-17.50%. NBFC loans are even costlier.
Documentation more complicated
Banks lend for a used car only after the car title has been transferred to the customer's name. Banks offer a line of credit to branded pre-owned car dealers who offer the loan to buyers and transfer the car title. Or, buyers purchasing directly from a seller pay a token amount, sign a deal for the total payment amount, get the car title transferred in their name and then approach bank(s).
Banks may refuse to lend if a car's registration certificate (RC) is not in the name of the seller. If the car insurance is not renewed, banks can spoil the party.
For new cars, only know-your-customer (KYC) and income documents are required.
Loan approval takes longer
Borrowing for a used car is a lengthy process. The seller and the buyer should be in agreement about the affidavit to transfer the car in the buyer's name. Then, the bank verifies the registration certificate and insurance documents, which must be transferred to the buyer's name. This can take 4-5 days before the loan is approved.
For new car loans, once the KYC formalities are over, a customer with a good, credit history can get the loan approved in a day.
Issues over cars from other states
Some banks and NBFCs may approve a loan application for buying a pre-owned car subject to the car being registered in the same state the borrower lives in. In case of new cars, lenders don't have problems with borrowers taking the delivery from any other city state as long as the car is taken from an approved dealer.
Remember banks are more stringent about product norms than NBFCs.
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