Personal Loan vs. Pre-Owned Car Loan : Which one is better for buying a pre owned car

If you are buying a pre-owned car, now is a great time to buy. With various brands rolling in new models or facelifts, almost-new cars have started turning up in the pre-owned car pool. So you could actually get your hands on a car which may have clocked just 15,000-20,000 km. Also, since the overall road condition in India has vastly improved, you are likely to find cars that are much better in overall condition than yesteryears.

Now that you have decided to buy a pre-owned car and decided to fund the purchase with a loan, let’s come to the question that many buyers struggle with. Should you take a personal loan or a pre-owned car loan to buy a pre-owned car?
 

Understanding a Personal Loan and a Used Car Loan

Let’s first understand what is a personal loan and a pre-owned car/used car loan.

• Personal Loan: This is an unsecured loan and the loan amount depends on your income level and credit score. So if you have clean credit records, applying for a personal loan is a good option.
• Used Car Loan: A secured loan, it's easier to get this loan irrespective of the credit history that you have. However, you can only get 70-80% of the total car value under this category. Also, the interest rates will vary, depending on the condition of the car you are planning to buy.

Personal Loan Vs Used Car Loans - Main Points to Consider

Now, before you jump to conclusions, please weigh the advantages and disadvantages of both the loans. Here are a host of factors that should help you take the right decision.
 

Rate of Interest

This one is very important since it will decide how much money will go out of your pocket every month. Since personal loans are a kind of unsecured financing, the interest rates charged under them are a bit higher. However, you may be able to secure funds at an attractive personal loan interest rate if you have a high income, low debt-to-income ratio, high credit score, and are employed at a reputable company. But is the interest rate low enough to be favoured over a used car loan? Perhaps not. The major reason for this is that your car is hypothecated with the lender when you get a used car loan. However, ensure that the car you are buying is in a good working condition and its make and model have a high resale value. In this case, the lender will have an easier time recovering the outstanding loan amount in the event of a default.

Loan Amount

Loan Tenure

Credit Score 

Process of Loan Approval

To Conclude

Both personal and used car loans have their own pros and cons. However, on careful examination, the latter is more ideal for purchasing a used car. The reasons for this are the low used car loan interest rate, the larger loan value of up to Rs 50 lakhs, and flexible repayment terms. On the other hand, if you take a personal loan to buy a used car, the maximum fund value of Rs 5 lakh may not be enough to get you a car with modern features.
 
Disclaimer: This post was first published on 13th November 2021 and has been updated for the latest information, freshness, and accuracy.