Should you take a used car loan?

Many people who picture a used car think of a noisy clunker with a paintjob that has seen better days, uncomfortable seats that smell badly, and a shoddy interior that can definitely use some patching. However, that’s not usually the case. Used cars are in huge demand today, and with so many startups offering certified vehicles that have been tested and checked thoroughly, it makes more sense to get one of those rather than spend a fortune on a new car which is only slightly better than them.

If you are pondering whether you should get a used car loan, then perhaps it’s better to get some insight on the issue first.

Depreciation

New cars depreciate much faster than used cars. In fact, some new cars can easily lose as much as 40% of their value in the first year itself. Used cars on the other hand depreciate slowly. They can easily retain the same value for 3-4 years. Thus, it makes sense to sense to get a used car loan instead of a new car loan.

Another way to compare a used car loan with a new loan is to understand how you will be repaying the loan for at least a few years. In case of a new car, by the time you will pay the final instalment the resale value of the car itself would be too small. However, in case of a new car you can still get a decent amount by selling it.

New Car Fees

Many car dealers impose a variety of charges on new cars, such as handling charges (or logistics charges), registration charges, Life Time Road Tax, etc. Depending on your car these charged in combination can be quite high. A user car will be able to save you from most of these charges (which can go as high as a few lakhs). Thus a second hand car loan is certainly better for this reason.

Used Car Loan Interest Rate

When it comes to car loan interest rates then new cars certainly take a win. Most used cars come with high interest rates due to the following reasons:

  • Resale Value: Banks always have to keep in mind that if someday the loanee fails to repay or makes it to the loan defaulter list, then they may have to take possession of the car and get their money back by reselling it. Since, it is easier to predict the resale value of new cars in comparison to old cars they balance the risk with the latter with a high interest rate.
  • Credit Score: People who have high credit scores usually purchase a new car, and vice versa. While this may not always be the case the lenders still go by this. If anything, they know that the risk of repossession is lower with those buying new cars than those buying the old ones. Thus, they tend to offer higher interest rates on used cars.

Quality Risks

Unless you are buying an old car from a trusted seller who sells certified cars there is always the risk of getting a car that has low-grade aftermarket parts or alarms. For all you know you could be paying half the price of the car in repairs and upgrades after you have bought it. With the strain of a used car loan already on your shoulders, the additional expenses could pose a major challenge for you.  If you want to stay on the safe side, it is best to invest in a new car with a loan at a good interest rate.

Conclusion

Used cars and new cars have their advantage and disadvantages, which is clearly evident by the points discussed above. A loan for the former will be less of a burden than the former, but it may also be risky for the long term. Thus, in the end it is your call what’s important to you and what your long-term goals are. Be sure to go through each advantage and disadvantage and align them with your financial standing before making the final decision. Proper planning can save you from a lot of hassle in the future.

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