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How Much Should You Spend on a Second-Hand Car

If you have ever bought a car before, you have probably debated whether to buy a new car or a used one. While it may sound enticing to buy a brand-new car, sometimes it may make more sense financially to buy a used one. However, buying a second-hand car is not easy. Due diligence is required to ensure that you get the value for your money.

Second-hand cars are economical but they can often end up costing you more than a new one. You need to take into account maintenance, fuel economy, repairs, not to mention the monthly EMI if you opt for a used car loan.

Considering the high rate of depreciation in new cars, buying a used car can be a smart decision provided you do your homework well. Therefore, before you head to your nearest dealership, there are certain questions you should be able to answer.

A fundamental question that arises is how much should you spend on a second-hand car. Some say it should be 10% of your total income, few feel it should not exceed 20% while there are others that advocate the 20/4/10 rule. According to this rule, pay at least 20% of the cost as down payment, do not finance the car for more than four years, and the total monthly expenses on the vehicle should not exceed 10% of gross income.

The total amount you end up spending depends on a variety of factors including some that are mentioned below.
 

Key considerations before deciding the budget for a used car

 
  1. Attitude

    Are you an economical buyer who wants a car just to meet basic needs? Such buyers do not care about brands, look, etc. as long as their basic requirements are met. Are you among those who care about the car features, model, etc. but at the same time do not believe in splurging money on unnecessary things that add to the price? Then, there are also those who consider vehicles to be a style statement and do not mind splurging as it adds to their social status.
     
  1. Condition of the car

    Check the condition of the car, level of wear and tear, status of the engine, repair history etc. It is not enough to check just the exteriors like paint and appearance. You also need to be mindful of the vehicle history, whether the vehicle has met with any accidents. A great way to accomplish this is to get a mechanic to check the car.  All this helps in determining if the car is worth the price and the maintenance costs.
     
  1. Mileage

    This is an important factor you should consider when calculating the cost of a second hand car. If the mileage is high, the wear and tear on the parts will be greater and there is likely to be a need to replace them. This will help you determine the maintenance cost and monthly fuel charges.

Also Read: How To Get A Second Hand Car Loan In Delhi-NCR
 
  1. Test Drive

    The best way to ensure that the car you want to purchase functions well is to take it for a test drive. Check whether the engine makes noise, if there is smooth gear transmission, car handles, clutch, brakes etc. Since these parts are expensive to replace, you will get a better estimate of the costs involved.
     
  1. Model

    Buyers want to get the best model possible within their stipulated budget. It is advisable to go for newer models that are popular in the market. This will ensure that spare parts are easily available and it will offer a better resale value if you plan to sell it sometime in the near future.
     
  1. Disposable Income

    Amount that remains after all the deductions, which an individual can choose to spend or save, is the disposable income. This is the biggest factor that will help you determine the make and model of the car you can afford to purchase.
     
  1. Resale Value

    The resale value of a used car is vital to consider before buying it, as it can affect the overall value of the four-wheeler over time. If the vehicle you are buying is highly vulnerable to depreciation, you might not get approval for the amount you desire and you have to spend more on the down payment. The reason is the car with a higher resale value is likely to be more in demand in the market, making it easier for the lender to sell it in case of default.
     
    In India, a car's resale value depends upon several factors, such as the car's make and model, age, condition, and mileage. 
     
  1. Odometer Reading

    An odometer reading is another consideration before deciding the budget for a second-hand car because it provides information about the car's mileage, which can be used to determine the car's overall condition and estimate its value. A high reading may indicate that the vehicle has been well-used and may be more likely to need frequent repairs or maintenance. Additionally, you can use an odometer reading to verify that the car has not been tampered with, which can be a sign of potential problems. 
     

How to get a car if you are on a tight budget?

 
A used car loan can help you finance the four-wheeler purchase. That means instead of paying for the entire cost of the car upfront, you can borrow money from a lender and pay it back over time with interest. 

When you apply for a car loan, the lender will look at your credit score and income to determine how much they are willing to lend you and at what interest rate. If you have a good credit score and a stable income, you may be able to qualify for a lower interest rate, which will make your monthly payments more affordable.

Car loans can have a fixed or variable interest rate, and the repayment term can vary from 1-7 years. Once you have been approved for a loan, you can use the money to purchase the car from a dealership or a private seller. 

Also Read: Steps to Buying a Second-hand Car on EMI

 

To Avail Used Car Loans
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Steps involved in Financing a Used Car

 
  • Shop around

    Compare rates from different lenders.
     
  • Gather necessary documents

    To apply for a car loan, you will need to provide proof of income, such as pay stubs, and proof of residence, such as a utility bill.
     
  • Apply

    Once you have found the best rate and gathered all the necessary documents, you can apply for a car loan.
     
  • Review the loan agreement

    Before accepting the loan, review the loan agreement carefully to make sure you understand all the terms and conditions.
     
  • Provide a down payment

    Most lenders will require a down payment, usually between 10-20% of the car's total cost.
     
  • Sign the loan agreement

    Once you have reviewed the loan agreement and provided a down payment, you can sign the loan agreement and finalize the financing for your used car.
     
  • Insure the car

    After buying the car, insure it to protect it from any damage, theft or accident in future.
     
  • Insure your loan

    You can also opt for a loan insurance to protect your family against the burden of the loan in case of an unfortunate event.
     

Conclusion


How much a person is willing to spend on buying a used car is a personal choice. There is no one-size fits all answer here. Calculate your disposable income, cost of the car, monthly expenses etc. Last but not least, compare and research to negotiate the best possible deal.
 
Disclaimer: This post was first published on 5th March 2022, and has been updated for the latest information, freshness and accuracy.

 


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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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