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Taking a car loan vs. buying a second-hand car

14 November 2016
Ever wondered if it’s a better idea to take a car loan, or simply buy a second-hand car?
 
 

A swanky brand new car is always an alluring proposition. Yet, buying a bigger car that has been driven around for just five years, at less than half its price can be tough to ignore. So, should you simply get a loan and buy a new car or play it smart with a second-hand car?

Let’s take a 5-year perspective to ensure short-term benefits do not end up overshadowing the long-term risks and disadvantages of your decision.

  1. Choice of Car

With a car loan, you will get to drive a brand new car by paying a small part of your monthly income towards the EMI. You can enjoy the latest features like high-end entertainment systems, GPS tracking, rear-view cameras and even sensors that transfer performance and maintenance data over the Internet. On the flip side, your options may be restricted if you have a small budget.

According to a recent study, for10 new cars sold, almost 22 used cars are finding buyers. A used car will be cheaper, which means you can opt for a high-end sedan instead of settling for a small compact hatchback. A well-maintained car that is less than five years old will come at a significant discount as compared to a new car. However, you will have to work a lot harder to identify the best used car.    

Related: Modern auto technology and how it could impact car insurance premium

  1. Maintenance

A new car comes with a warranty period that can be extended at a nominal additional payment. Furthermore, since the vehicle is brand new, there is zero scope for wear and tear, hidden structure or other damage, installation of fake parts, and other such issues. However, a lot depends on how usage and frequency of maintenance.

A badly-maintained new car can give you more trouble as compared to a used car that is maintained in mint condition. Buying a used car from a responsible owner can help you avoid a lot of maintenance hassles.

The risk with used cars is that not buying the right car can result in numerous issues like:

  • Additional expenditure on repairs and maintenance
  • Unavailability of spares, especially for older models
  • Repairs become costlier because your options and choices get restricted
  • New problems cropping up more often.

Related: Car Service Checklist To Save Your Money [Infographic]

  1. Finance

In the past, those who purchased used cars had no option but to buy it out of their personal savings. Finance was available only for new car. Today, you can easily get a loan to buy a new as well as a used car.

  • Of course, a new car loan is easier to obtain and involves fewer risks for the lender. With used cars, you may have to deal with additional issues like Valuation issues of the used car
  • High interest rate due to risk of hidden problems in the vehicle
  • Non-availability of finance for less-popular models.

Yet, a used car loan may be a cheaper proposition because you will borrow a smaller amount as compared to a new car purchase. You can opt for a higher EMI and save on interest costs without straining your monthly budget.

Related: Just bought a new car? Here’s what you need to next

  1. Registration and Formalities

Documentation requirements, charges, road tax, and other formalities related to car registration can vary from state to state. Form 29 and Form 30, NOC from the lender, Form 28, NOC from the insurer, letter transferring the car insurance policy, but not the No Claim Bonus, proof of delivery of possession—these are just some of the documents that you will require when registering a used car in your name.

Chances are high that you will not have to worry about these formalities when buying a new car as the dealership takes care of all this after acquiring your signature on the dotted line. Yet, this may not seem like a very big deal, especially if opting for a used car helps you save a lot on the initial cost and long-term finance charges. 

  1. Law Changes

Earlier this year, a court judgment banning diesel cars older than 10 years meant that 1.6 lakh car owners in New Delhi ended up as owners of scrap vehicles. Do you want to wake up one day to find that going on a long drive has become a punishable offence? This is the one risk of buying a used car that cannot be avoided.

Related:Checklist for buying/selling a second hand car

You may still want to opt for a used car. However, ensure that it is an informed decision where you know the potential risks that you may face over the next five years. To get the best possible deal, it is advisable to compare your options, negotiate the price, and only then finalise your car purchase.

 

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