Wednesday, September 28, 2022

How to Keep a Check on Interest Accrual for Your Used Car Loan Financing

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Interest rate is one of the most widely considered factors that come under speculation when availing used car loan financing for a second-hand four-wheeler purchase. It is primarily so because used cars are considered to be assets carrying high risk of deterioration in a short term, thus attracting higher interest rates than loans for new car purchase. This is not entirely true though as the interest rate levied is totally subjective to several crucial factors that often go unnoticed. Some common reasons why the notion of high interest rates prevails for used car loans include –

  • The vehicle remains used, thus having lost a percentage of its value by the time it reaches the new purchaser.
  • For the dealership selling the car, a lot of financing may already be involved in ensuring its optimal state for re-purchase.
  • The overall insurance coverage for a used car deteriorates too due to its depreciation.

Now, while these aspects remain applicable, they only partly affect used car loan financing because the latter is much dependent on the car of choice that the borrower makes for availing a loan. Some crucial aspects related to the vehicle that may differ the used car loan interest rates include the following.

  • Age of the car
  • Number of previous owners of the car
  • Insurance plan type availed for coverage
  • Amount and frequency of insurance claims made
  • Major or minor repairs undertaken
  • Total distance covered by the vehicle
  • Optimal mileage that the car provides
  • Depreciation percentage considered by the lender during IDV computation

Choosing a used car after optimised navigation of these factors can help bring down the interest rates on your used car loan.

Now, let’s find out the various ways related to used car selection as well as the individual borrowing profile that can help secure the best rates on used car loan financing.

Make a Higher Down Payment Than Required

Making a higher down payment than the required percentage allows a representation of low credit dependency by the borrower. It helps secure the lender’s favour due to low risk involvement, thus helping avail low used car loan interest rates. A high down payment also leaves room for better accommodation of your total loan value, thus keeping the repayments affordable.

Select a Short Repayment Period

Even though it might be tempting to go for a long repayment tenure if available, it can be wise to choose a short period for repayment. It is because even though a long tenure brings down the EMIs payable, it leads to high total interest accrual. The loan may thus ultimately prove costly for the borrower as he/she may end up paying high interest. Thus, it is advisable to choose a tenure that provides the best mix of the long and short-term affordability.

Choose a Loan Amount Lower Than Your Maximum Availability

Depending on your financial and credit profile, you may be eligible for a high loan value. It is, however, not suggested to apply for the entire availability as used car loan financing since a high loan value leads to higher interest accrual as well. Further, a high loan value also blocks your finances, disabling the availability of any new credit, if needed. You can check your maximum loan availability with an eligibility calculator and apply for the loan within that limit.

Make a Detailed Comparison of Lending Institutions

The used car loan interest rates levied by various lenders can differ significantly. It is thus advisable to go for a widespread lender comparison in the financial market to find. The lowest levy for affordable loan financing and enable easy vehicle purchase.

Choose to Purchase a Used Car Not Older Than 2 Years

From the financial institutions’ perspective of conservative lending. It is ideal to purchase a car not older than 2 years to get the best prevailing rates. Cars that breach this age mark carry a high risk of deterioration and thus attract high interest rates as well.

Check If the Car Was Thoroughly Covered with Insurance

If the car is not thoroughly covered under an insurance plan, any damage or its repair may go unnoticed. Thus enhancing lender risk of resale value. Thus, make sure that the used car you are availing. The financing for has held up insurance coverage all along its years of use.

Alongside, it is also desirable to purchase a car that does not have a history of any previous repair or replacement for the same reasons.

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When Repaying, Pay in Higher EMIs Than Agreed

Once you have availed the loan, you can choose to save on the total interest accrued by increasing the EMIs payable. When making such an increment. However, make sure to not load your income heavily with the EMI value as it also impacts your future credit eligibility. Part-prepayment and foreclosure are other useful ways to save on your EMIs payable for the used car loan.

In case you have already secured your used car loan financing at a high rate. You can still reduce the rates applicable by choosing to go for the balance transfer of your loan with a new lender. The refinancing facility allows you to secure better rates on your loan along. With other favourable terms on the advance simplify loan management.

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