How Does Interest Rate of your Used Car Loan Impact your EMIs?

Mar 02, 2017

Are you looking to take a used car loan? Then we are sure that first thing that you are focusing would be on getting the required loan amount. Next on your checklist would be having a low interest rate for the loan.

But it is worth mentioning here that in general, used car loans are 3-5% costlier than new cars loans. Many people seem surprised at this. The reason is that used cars are cheaper than newer ones and hence, the loans too should come cheaper.

But that is not how lenders think. According to them, a care (used or new) is a loan collateral. So in case of default, they have the option of taking it and auctioning it off to get their dues.

So when a used car is taken as collateral, the lender is taking an already-depreciated asset. Hence in case of default by the borrower, the lender will get very less value for the used car in secondary markets. This risk, which is much more in case of used cars than in that of new cars - is the reason why lenders want to be compensated more. And additional compensation is in form of higher interest rates. So while you can get a new car loan for 11-13%, you will get a loan for used cars at around 15-19%.

But actual interest rate depends on a variety of factors and can differ from one case to other. Age of car and loan tenure is considered. Lower both are, lower will be the borrowing rates. Also, lenders use a simple thumb rule to decide whether to lend or for how long to lend. This rule is simple - Add the loan tenure to the age of car and the sum should not exceed 8 years. So in terms of this rule, remember that lower the sum is lower will be your rate of interest. And so will be your loan EMIs.