9 Mistakes To Avoid While Applying for a Used Car Loan

A used car is the best money-saving solution when looking to bring home your first four-wheeler. However, buying a car, new or used, is a massive decision, and hence a lot of thought goes into it. It requires planning and research to understand the pros and cons of going for a particular car. In the same way, financing that car also needs the same amount of planning. At the same time, multiple lucrative schemes might tempt you to rush in to grab the offer. It is necessary to consider the potential pitfalls before opting for a car loan. Let us get to know what they are.

Mistakes You Should Avoid While Applying for a Second-Hand Car Loan

Rushing into applying for car loans can result in mistakes, leading to loan rejection or a rise in interest rates. Here are a few common mistakes that people make when applying for a Used Car Loan for you to avoid.

1. Overborrowing

Most borrowers make the severe mistake of borrowing more than their budget. When you borrow more money than you can afford due to poor repayment planning, it might stress your finances, leading to defaulting on the loan. Calculating the estimated EMI in advance using a Used Car Loan EMI calculator will help you understand the loan’s affordability, eliminating future complications. Deciding upon an affordable EMI within your budget will help you do this.

2. Choosing a Longer-term Tenure

When applying for a Used Car Loan, always choose a shorter term that you are comfortable paying. Choosing a longer term usually brings a high interest rate and longer commitment time. The only benefit of a longer tenure is reduced EMI payments, making it more affordable. Yet, a longer term accrues more interest, increasing the total cost of the loan.

Calculating your optimum tenure using the Muthoot Second-Hand Car Loan EMI Calculator can help you choose a suitable tenure that suits your budget.

3. Shopping Without Pre-Approval

Before shopping for a car, check if you qualify for a pre-approved loan from your lender. Pre-approved loans often come with better interest rates compared to standard loans. Moreover, they provide clarity on the loan amount and interest rates available to you, helping you plan confidently. With a pre-approval, you can expedite the car-buying process without concerns about loan approval delays.

4. Not Reading the Terms and Conditions

Used car loan interest rates, processing fees, penalties, prepayment fees, etc., vary from lender to lender. Not all lenders offer a transparent process like Muthoot Capital; hence, understanding the terms and conditions provided in-depth will help you determine if the loan offered is beneficial to you.

5. Not Making a Down Payment

While Muthoot Capital can offer up to 100% of the IDV or Insurance Declared Value as a Used Car Loan, making a large down payment is a good idea to reduce the loan’s burden. Making a significant down payment will allow you to choose a shorter tenure, which will reduce your interest rate, and get a reduced monthly EMI amount to fit into your budget.

6. Not Comparing Interest Rates and Loan Terms

When applying for a Used Car Loan, many borrowers fail to compare interest rates and terms across lenders. This oversight can result in higher costs. To avoid this, evaluate offers from multiple banks and financial institutions, considering factors like interest rates, processing fees, loan tenure, and prepayment penalties. 

For instance, if Bank A offers a loan at 9.5% and Bank B at 8.75%, a Rs. 5 Lakh loan for five years could save you over Rs. 20,000 with Bank B. Comparing options carefully ensures a cost-effective loan and significant savings over time.

7. Ignoring Your Credit Score

Knowing your credit score is essential before applying for a car loan, whether for a new or used vehicle. A good credit score reflects your financial stability and repayment capacity. Lenders often offer lower interest rates and better loan terms to individuals with higher credit scores.

8. Financing Non-Essential Add-ons

Dealerships may tempt you with a range of add-ons when purchasing a car, such as high-end sound systems or decorative seat covers. While these extras may seem appealing, it’s important to evaluate whether they are truly necessary or simply inflating the overall cost of your purchase. Including these add-ons in your loan amount will only lead to higher interest payments over time.

9. Always Approach Banks/NBFCs Instead of Dealers

Although dealers may offer convenient in-house financing at the time of purchase, it’s often more beneficial to approach trusted banks or Non-Banking Financial Companies (NBFCs) like Muthoot Capital for your loan. These lenders typically offer more competitive interest rates and better loan terms compared to the dealership’s financing options, which might come with hidden costs or less favourable conditions.

Must Read- Tips to Make the Used-car Loan Application Process Easy

Conclusion

Being cautious about the above factors can help you avoid costly mistakes and secure the most suitable financing option. With Muthoot Capital, you can confidently access competitive Used Car Loan solutions. Benefit from interest rates starting as low as 13%* per annum and enjoy up to 100%* financing on select car models under specific schemes. Flexible repayment tenures ranging from 12 to 60 months make the process hassle-free, ensuring you get the best value for your money.

FAQs

What is the best length of loan for a used car?

A loan term between 36 and 60 months is ideal, balancing affordable monthly payments and manageable interest costs.

What things to keep in mind before buying a used car?

Consider your budget, the car’s history, inspection, mileage, insurance, and ongoing maintenance costs.

How does second-hand car finance work?

You can finance a used car through hire purchase (HP) or personal contract purchase (PCP), with monthly payments and the car as collateral.

What are the risks of overborrowing for a Used Car Loan?

Overborrowing can lead to higher monthly payments, making it harder to manage your finances and potentially affecting your credit.

Is the loan amount in line with the budget?

Ensure the loan amount fits your budget, including down payment and monthly payments, without overstretching your finances.

What is the interest rate applicable on the Used Car Loan?

Interest rates vary based on the lender, loan term, and your credit score, typically ranging from 13% to 17%.

What is the overall cost of the loan?

The total loan cost includes the principal plus interest over the loan term, so be sure to calculate the full repayment amount.

Which loan tenure should be chosen?

Choose a tenure that balances affordable monthly payments and reasonable total interest, typically between 36 and 60 months.