Understanding Used Car Finance Rates – Ultimate Guide

When you decide to buy a second- hand car, chances are you are going to opt for a loan to fund your purchase. Thanks to the surging demand for pre- owned cars post Covid, there are a number of lenders now offering loan against car purchase. If this is your first time taking a big loan or first time with a car loan, you may be in for a confusing time understanding how it all works until you get your loan credited to your account. Here is a simple primer to help you unravel all of it, especially the used car finance rates.

EMIs defined

EMI stands for Equal Monthly Instalment. This is the amount you pay out every month towards repayment of your loan against car purchase. The EMI consists of the principal amount plus interest rate. During the initial months, the interest rate component is higher, principal lower and slowly, this reduces and the principal amount you pay back begins to increase as the months wind down.  The percentage of each component depends on the used car finance rates that the loan comes with and also the total loan amount.

Before you sign up for a second- hand car loan, the first thing you must do is check how much monthly outlay you are taking on. You can do this calculation using an online EMI calculator. Just plug in the numbers and the calculator tells you how much you pay each month. You will need to have your principal amount, your loan tenure and the interest rate charged ready at hand as inputs for the EMI calculator.

General factors that affect the interest rate of the loan are:

  • The market at present- How are interest rates faring at the moment? This affects the rates you are offered on your loan as well. A low interest climate could mean that you can take a loan that falls well within budget. A quick look at the rates offered by various lenders should give you a good inkling of how the market is at present. Check if your preferred lender is offering a rate within the prevalent range to know if he is competitive.
  • The demand for loans- If there is a surge in demand for used car loans, then many lenders enter the market, offering attractive rates to pull in more customers. You then have a choice of lenders to pick from and you can go with the one offering the best terms. In a low demand climate, there may be few lenders and you may have no option but to sign up with a lender who does not have attractive rates.
  • Age of the used car- It is a tough proposition to find a reasonably priced loan against car purchase for a vehicle that is very old. Cars that are older than 10 years are typically not financed by most lenders and you will have a difficult finding a competitively priced loan to make this purchase. Before you decide on your car, check with your preferred lender if they have limitations on loan sanction that hinge upon the age of the second- hand car to be purchased.

Apart from these general factors, car loan rates for used vehicles also depend on other things such as:

  • Your income- Higher income means easier loans with better terms
  • Your credit worthiness- Good credit score means you are a preferred customer and so you get better interest rates
  • Your existing relationship with lender- If you are already a borrower with the same lender, you are more likely to get the loan sanctioned easier and with better terms. Of course, this is true only if you have been regular with repayments on your current loan.

Now that you have a basic idea of the used car finance rates that apply on second hand car loan, you can do your homework to find the right loan. Also remember to factor in the lender’s reputation in the marketplace, their customer service record and the ease of processing the loan when you make your final decision. A reliable, reputed lender makes the loan process easy, quick and hassle free from start to end of tenure.

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