Used Car Loans For First-time Buyers - Explained

Congratulations on taking the exciting step towards purchasing your first car! A car is not just a fancy way to commute, it is the door that opens new opportunities, freedom, and convenience.

If you're a first-time buyer, navigating the world of car loans can seem daunting. But worry not, in this comprehensive blog, we will help you with all the knowledge you need to secure a car loan for first-time buyers. 

Understanding Car Loans for New-to-Credit Customers

A car loan in India is a type of loan offered by banks, non-banking financial companies (NBFCs), and even some car dealerships. It allows you to borrow money to purchase a car, new or used (often called a second-hand car loan). You'll repay the loan amount, along with interest, over a fixed period (loan term), typically ranging from 12 to 84 months. 

Here's why a car loan can be particularly beneficial for new-to-credit customers in India:

1. Building your Credit Score

• One of the biggest advantages is the opportunity to build your credit history
• In India, credit bureaus like CIBIL track your loan repayment behaviour
• On-time EMI (Equated Monthly Instalment) payments on your car loan will reflect positively on your credit report, helping you establish a good credit score
• This is crucial for securing future loans like home loans, personal loans, etc., at attractive interest rates

2. Manage Affordability

• A car loan allows you to spread the car's cost over several years, making it more manageable for your budget
• Instead of paying a large sum upfront, you can make fixed monthly payments (EMIs) that fit your income

Check Out : Used car loan EMI calculator

Researching and Choosing the Right Car Loan

Before diving into the loan application process, it's essential to do your research and choose the best car loans for first-time buyers. Here's what you need to consider:

1. Interest Rates

• This is the cost of borrowing the money
• Generally, a higher credit score translates to a lower interest rate
• So, improving your credit score before applying can save you money in the long run

2. Loan Term

• This determines how long you have to repay the loan
• A longer-term typically means lower monthly payments, but you'll end up paying more interest overall
• Choose a term that fits your budget comfortably

3. Down Payment

• While not always mandatory, a down payment (initial upfront payment) can significantly reduce the loan amount you need to borrow and potentially lower your monthly payments and interest costs

4. Lender Reputation

• Research different lenders, including banks, credit unions, and online lenders
• Compare their interest rates, loan terms, fees, and customer reviews to find the one that best suits your needs

Check Out : Used car loan eligibility

Documents Required for a Car Loan Application

Once you've chosen a lender, gather the necessary documents for your second-hand car loan first-time application. Here's a checklist of the documents you'll typically need to submit with your used car loan application:

1. Proof of Identity & Address (Everyone)

• Valid Passport
• Permanent Driving License
• Voter ID Card
• Job card issued by NREGA (if applicable)
• Letter issued by National Population Register (NPR)
• Aadhar Card (with consent letter, first 8 digits redacted, or e-Aadhar printout under 30 days old)
• Information about the car you're purchasing (vehicle identification number (VIN), year, make, model)

2. Proof of Income (Salaried)

• Latest Salary Slip
• Latest Form 16 or ITR
• Bank statement (if salary > ₹80,000 for past 3 months)

3. Proof of Income (Self-Employed - Varies by Business Structure)

• Partnership Deed (Partnership) or MOA/COI (Ltd. Companies) - Age & Identity Proof
• Latest ITR & Audited Balance Sheet (with P&L) - Proof of Income
• Tax Payment Proof (Advance Tax Challan/IT Assessment Order)

4. Additional Documents (May Vary by Lender)

• Passport Copy (Sign Verification)
• Photo Driving License (Sign Verification)
• Credit Card Statement & Copy (Sign Verification)
• Copy of Margin Money Paid to Bank

Disclaimer: This is a general list, and specific requirements may vary by lender. Always check with your chosen lender for their exact list.

Also Read : How To Transfer a Car Loan to Another Person

Used Car Loan Application Process

Securing a used car loan can seem complicated, but with the right information, it can be a smooth process. Here's a breakdown of the steps involved:

1. Research and Choose a Lender

• You can apply for a used car loan through banks or non-banking financial companies (NBFCs)
• Banks generally offer competitive interest rates, but NBFCs might be more flexible with loan approvals, especially for first-time borrowers
• Don't settle for the first offer! Research different lenders and compare their interest rates, loan terms (repayment period), processing fees, and prepayment penalties

2. Gather Required Documents

• Refer to the previous section "Documents Required for a Used Car Loan in India" for a checklist of documents typically needed

3. Submit Your Application

• Many lenders allow online applications, while some may require you to visit a branch
• Provide accurate and complete information in the application form

4. Loan Approval and Verification

• The lender will assess your creditworthiness based on your credit score and financial history
• The lender may send a surveyor to inspect the car's condition and determine its value
• This will influence the loan amount you can qualify for

5. Loan Disbursement and Car Purchase

• Once approved, you'll receive a loan agreement outlining the terms, interest rate, and repayment schedule
• Review the agreement carefully before signing
• Upon signing the agreement, the lender will disburse the loan amount directly to the seller (individual or dealership) or your bank account (if you're paying the seller directly)
• Don't forget to transfer the car's registration to your name after the purchase

6. Additional Tips

• Negotiate the interest rate with the lender, especially if you have a good credit score or a stable job
• If you have a limited credit history, a creditworthy co-signer on your application can improve your chances of approval

By following these steps and being prepared with the necessary documents, you can navigate the used car loan application process in India with confidence.

Also Read : New Car Loan Vs Used Car Loan: Understand the Difference

Tips for First-Time Car Loan Buyers

1. Shop Around

• Don't settle for the first offer you receive
• Compare rates and terms from multiple lenders to find the most favourable option

2. Consider a Co-signer

• If you have a limited credit history, having a creditworthy co-signer on your loan application can improve your chances of approval and potentially lower your interest rate

3. Understand The Fees

• Be aware of any origination fees, processing fees, or prepayment penalties associated with the loan

4. Budget For Additional Costs

• Factor in car insurance, maintenance, and gas costs when determining how much car you can afford

Loan Repayment and Building Your Credit Score

Making your car loan payments on time is crucial. Not only will it fulfil your financial obligation, but it will also significantly contribute to building a strong credit score. Here are some additional tips for managing your loan:

Set Up Automatic Payments

• Schedule automatic payments to avoid missing a due date and incurring late fees

Consider Bi-weekly Payments

• Making bi-weekly payments (every two weeks) can effectively make one extra payment per year, which can help you pay off your loan faster and save on interest

By following these steps and making informed decisions, you can secure a car loan for first-time buyers that fits your budget and helps you establish a healthy credit score. 

The Bottom Line 

Congratulations! You've taken the first steps towards owning your first car. With a used car loan, you can turn that dream into reality and unlock the freedom of the open road. This guide has equipped you with the knowledge to navigate the loan application process with confidence.

Now it's your turn to get behind the wheel! Research different lenders, compare rates, and don't be afraid to negotiate. Remember, a little effort upfront can save you a significant amount on your first car purchase. So, buckle up, get researching, and get ready for your exciting car-buying journey! 

FAQs

1. What is the best car finance for the first time?

The best car finance option for first-time buyers is typically a car loan offered by banks, non-banking financial companies (NBFCs), or car dealerships, as it allows you to spread the cost of the car over several years, making it more manageable for your budget.

2. Is it good to buy a second-hand car on loan for the first time?

Buying a second-hand car on loan for the first time can be a good option, as it allows you to purchase a quality vehicle without needing to pay a large sum upfront. However, it's important to research and choose a reliable lender, compare interest rates, and carefully review the loan terms before making a decision.

3. Who has the best first-time car buyer program for car loans?

Various banks, NBFCs, and car dealerships offer first-time car buyer programs with competitive interest rates and flexible loan terms. It's advisable to research and compare different lenders to find the one that best suits your needs and offers the most favourable terms for your situation.