The demand for second-hand cars has been increasing exponentially. Much of their popularity stems from the fact that used cars are available in different brands and models. Besides, getting a used car is the most affordable way to own your dream car without putting much financial burden on your shoulders. With the current financial instability induced by the pandemic, getting a used car makes more sense, as you can buy your dream and yet put some of your money into your emergency savings.
However, getting a used car can still put a burden on your pocket if you are going through a rough patch. In such cases, it is advisable to apply for a used car loan. It is the best way to own a car and yet be able to manage your finances without putting any burden on your savings. However, before applying for a used car loan, it is imperative to how the interest rate works and how to avail yourself of an affordable interest rate.
Used car loan interest rate
A used car loan interest rate has a direct impact on your EMI amount. It determines whether or not you can afford to pay the loan within the stipulated EMI. The lower your interest rate, the better your chances of making timely repayments of your loan.
Your lender decides your interest rate based on factors, such as the loan amount, income, credit score, current financial obligation, etc. While applying for a used car loan, you will need to find a lender that offers the lowest interest rate.
Here are the best ways to reduce your used car loan interest rate:
- Choose a lower loan amount
The loan amount you need has a direct impact on your interest rate. If you opt for a higher loan amount, you may have to incur a higher interest rate. Generally, lenders offer higher interest on the higher loan amounts to justify the risks involved. Choosing a higher loan amount shows that there are more chances of defaulting on repayments. So, while applying for a used car loan, it would be wise to choose a loan amount you need, preferably a lower loan amount.
- Make a bigger down payment
Your lender may not offer you the entire value of your vehicle as a loan. You may be able to secure only up to 80% of the vehicle’s market value as a loan, which means that you will have to pay the remaining 20% as a down payment. The bigger the down payment, the lower will be your loan amount, therefore reducing your interest rate. So, if you have a surplus amount in your account, it would be wise to make a bigger down payment.
- Make a comparison of lenders
The used car loan market is quite competitive. Lenders offer different rates to attract borrowers. Before submitting your application, you will need to conduct thorough research on used car loan lenders and their interest rate offers. Find at least three to five lenders in the market and compare their interest rates. You should find a lender that offers the lowest interest rate and has no prepayment penalties.
- Maintain a healthy credit score
Your credit score plays a major role in your used car loan application. Before approving your application, lenders check your credit score to determine your creditworthiness. Besides, your credit score is also used to figure out an interest rate based on your application. To get a lower interest rate, you will need to maintain a minimum CIBIL score of 750. Keep in mind that the closer you are to the 900 range, the greater are your chances of securing a lower interest rate.
- Choose a shorter loan tenure
Another factor that directly influences your used car loan interest rate is the loan tenure. If you opt for a longer loan tenure, your equated monthly instalments (EMI) will decrease, but you will have to pay higher interest in the long run. The total interest rate keeps increasing with time. But, if you opt for a shorter loan tenure, your EMI might increase, but the interest rate will significantly reduce. So, if you have a surplus amount in your bank account, make sure to choose a shorter loan tenure. This way, you can reduce the total cost of borrowing.
Conclusion
Your used car loan interest rate is one of the crucial factors in your loan application. It indicates whether or not you can afford to repay the loan amount without any burden on your monthly budget. To enjoy a stress-free loan, you must choose an interest rate that best fits your requirements.
