Understanding 6 key differences between New Car and Used Car Loans

Buying a car remains one of the most joyous moments for most of us Indians. However, many people decide to go for used cars instead of new cars, especially first-time buyers. Since buying a car involves investing a huge sum, many rely on Car Loans to buy their car. Therefore, apart from the car, you also need to consider what is better – a new Car Loan vs used Car Loan.

Difference between a new Car Loan and a used Car Loan

1) Condition of the car
A new car is fresh out of the factory and does not have any cause for depreciation, unlike a used car. Used cars are usually a bit more deteriorated and therefore, command a lower loan amount.

2) Rate of interest
New car and used car interest rates are different. Used Car Loans come with higher interest rates than new Car Loans. Given their depreciated value, older vehicles are risk-prone, forcing lenders to charge higher interest.

3) Loan tenure
The loan tenure for used Car Loans is shorter than for new Car Loans. However, many lenders allow up to five years for repayment of used Car Loans, while new Car Loans permit up to seven years for repaying the borrowed amount.

4) Loan approval process
The loan approval might be longer for used Car Loans than for new Car Loans because, in the former scenario, the lender holds a comprehensive inspection of the vehicle. When purchasing a pre-owned car from an unorganised seller, the disbursal process takes longer.

5) Loan to value ratio
Loan to value ratio (LTV) is lower in the case of used Car Loans as compared to new Car Loans due to value depreciation of used cars.

6) Resale value and depreciation rates
While a new car is unused, its resale value is high. Meanwhile, the resale value of used cars is lower as the depreciation rates are higher.  

New vs pre-owned Car Loans: Features and advantages

• Higher-end / latest models: Both new and pre-owned Car Loans allow you to buy higher-end and latest models. However, the amount of loan sanctioned will be higher in the case of new Car Loans.
• Loan to value ratio: The LTV ratio is higher in the case of new Car Loans. As the value of new cars depreciates slowly, banks finance a higher amount as compared to pre-owned Car Loans. Conversely, it is lower for used cars.
• Tenure: The tenure for new Car Loans is more as their shelf life is longer. The age of used cars is more, therefore, their remaining useful life is less, leading to shorter tenures. Interest rate on new cars vs used cars differ accordingly.
• Approval process: The approval process for new Car Loans is relatively quicker as compared to used Car Loans.

Factors to consider before making a decision

1. Lifestyle preferences and driving habits
If you are living a good lifestyle or are already a seasoned driver, then you can go ahead with a new Car Loan.

2. Future plans (short-term and long-term needs)
If you are buying for a long term, then a new car is ideal. For short-term or first-time drivers, a used car is the better option.

3. Environmental considerations
New cars are more environmental friendly and cause lower pollution as compared to used cars. This is an important point for those who are environment conscious.

Also Read: Car Loan vs Car Lease: Key differences

Conclusion

Choosing between a new car and an old car involves considering a lot of factors, including the loan and interest rates on used cars vs new cars. New Car Loans are relatively easier to avail of and come with better terms as compared to pre-owned Car Loans. At the same time, the selection of the right lender is crucial to getting loans at the best terms.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.