Pre-owned vehicle financing.
Owning a car is no longer a luxury for the Indian middle class . With several ways of financing, coupled with the recently reduced Goods and Services Tax (GST) on four-wheelers with smaller engine capacities, many can buy a car today. But when choosing between financing and paying the lump sum cost upfront, you may face a dilemma. Paying upfront from savings means temporary reduced liquidity. Whereas paying through a loan means eventually paying more than the car's value. So here is a breakdown on which option makes more sense for pre-owned cars.
Buying a used car directly from savings and buying it with the help of a used car loan are two very different approaches.
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Paying from Savings |
Paying by Second-hand Car Loan |
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There are no borrowing costs or long-term obligations to pay equated monthly instalments (EMIs). |
There are no upfront lump sum costs, just affordable EMIs to be paid every month. |
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It reduces your savings corpus significantly and can lead to a financial crisis in times of emergencies. |
The upfront costs are spread across a longer period, keeping your savings intact. |
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There are no additional costs associated with the interest on a car loan. |
Regular payments are structured and easily managed using auto-pay mechanisms. |
The decision depends on your financial capacity and situation at the time of buying a pre-owned car. However, some scenarios can help you make a better decision.
Here is a clearer picture of when it makes more sense to pay for a pre-owned car from savings and when to pay the extra costs in the form of a used car loan interest rate.
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Scenarios |
Pay from Savings |
Pay by Car Loan |
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If you think keeping your savings intact during times of potential crises is more important. |
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If you have a significant savings corpus that is at least 50% more than the full value of the used car. |
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If your savings are mostly invested in financial instruments that can give higher returns than the interest rate of a pre-owned car loan. |
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If you have a secondary source of income that replenishes your savings regularly. |
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If you have a stable income, the EMIs of a car loan are easily affordable. |
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If the used car is being purchased by a family member, relative or friend as a gift to you. |
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If you are looking for a loan to buy a used car, then you need to understand the additional cost implications of a used car loan.
Besides the cost implications, liquidity and opportunity cost analysis are also important deciding factors on when paying from savings makes more sense. Retaining your savings means:
Hence, the opportunity cost of using savings should be compared with the cost of a second-hand car loan.
Used car loan interest rates may be higher than those of new cars. But reputable banks like IDFC FIRST Bank offer higher Loan-to-Value (LTV) ratios of up to 100% of the value of the used car.
This means that you get access to more funds, as and when needed, during the tenure of the second-hand car loan. You are no longer limited to the value of the car. With LTV as high as 200%, you can obtain funds up to 200% more than the asking price of the used car.
Moreover, banks nowadays have digital platforms ready to offer you second-hand car loans in just one click. These online platforms can check your credit score and offer you an attractive interest rate for a second-hand car loan.
The initial dilemma of choosing between savings and a second-hand car loan may have been resolved. But the decision to pay from savings is still a big one and should be taken carefully. It is advisable to plan for the future, retain your savings, and instead choose a second-hand car loan.
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