(Disclosure: This blog post is sponsored by Credit Sudhaar)
Getting a car loan, irrespective of whether used or new, is often said to be a bad idea. This is because cars depreciate quickly over time. In other words, cars lose their worth over time faster than other kinds of assets.
In fact, some assets, such as real estate, increase in their worth over time. On the other hand, even a new car can lose 50% of its market worth in 5 years.
So, if you are planning to buy a used car with a loan, make sure you understand the advantages and disadvantages of the same.
- Easy on the Pocket
People buy a used car because they don’t to stress themselves financially, and that’s perfectly alright.
With a used car loan, not only you get to buy your favorite “hot wheels” at an affordable price, but you also don’t have to pay the entire amount in one go.
With a used car loan, you can easily pay off the full amount (which is already quite low) in small installments on a monthly basis.
- Builds Credit
The best bad credit fix method is to build score through loans and credit card payments. This is where a used car loan can come handy. Since the loan amount is likely to be quite affordable you can easily pay off the installments on a timely basis and improve your score quickly.
- Saves Money
A used IDBI, SBI or HDFC car loan may add another expense to your current list of expenses but it can also save you a lot of money. By having your own car, you can reduce your transportation costs to a great extent. Plus, your spouse can commute to the work too and save even more money.
- High Interest Rates
The interest rates on used car loans are usually higher than those on new cars, and there are multiple reasons why. First, since the duration of a used car loan is shorter (with the loan amount being smaller) banks try to make up for it through high interest rate. Second, it’s difficult to predict the depreciation rate of used cars. So, if you default on the loan and the lender has to possess the car and sell it, they won’t be able to get a fair price. Some also believe that lenders put high interest rates on used car loans to deter the customers in the interest of selling new cars.
- High Depreciation Rate
Financing a used car is especially a bad idea because it will depreciate fast. So, you will be paying money on a monthly basis on something that’s losing its value. If you decide to sell your car in the future you won’t get a quarter of the price you paid for it in total (principal amount+ interest).
- Additional Costs
Although there are many dealers that sell used cars that are in excellent condition, they still are more likely to malfunction more often than new cars. So, while you will have a monthly EMI to deal with already, when there are repair costs, etc. it can put more financial burden on your shoulders.
Now that we have discussed both the advantages and disadvantages of financing a used car, the question remains- is it worth it? Unfortunately, there is no right answer to this question.
While it’s certainly better to get a loan for a new car, not everyone can afford that. In that situation getting a used car loan is not a bad idea.
However, there are ways you can make it work better. For instance, working on bad credit fix can improve your chances of getting better interest rates.
You can also compare the features offered by several dealers or wait for the best timing to submit a loan application.
Just don’t forget to pay your EMIs on time, as even a single late payment can affect your CIBIL score and make it even more difficult to get loans in the future.