Car loan is one of the most complex loan products in the market, mainly because the value of the asset against which the loan is taken, begins to depreciate the moment you drive out the car from the showroom. Notably, this is not the case with home, business or education loans.
Making this product more complex is the tie-up (often non-transparent) between car manufacturers, car dealers and institutional lenders that often club together various cash discounts, or launch special promotional offers, around festive times, or to clear their end of the year inventories by offering ad-hoc interest rates and attractive deals and exchange offers, such as “0% processing fee,” “First four years service free,” “Car accessories of X value free,” “Exchange any car for A,B,C…” to cite a few.
Because of such ambiguity on interest rate for auto loans, there are various factors that come into play to affect your loan eligibility, such as your credit score, make and age of the old car, quantum of car loan applied for, age and income of the borrower etc. A default or delay in the past can very easily dent your chances of getting an auto loan sanctioned.
Understandably, loans on used car market attract a higher rate of interest than new car loans, although used car market is expanding in India. Since these are small-term loans, some institutional lenders also levy a prepayment penalty on car loan that may range between 3-5% of the outstanding loan amount. With negotiation and on the strength of a good credit history, however this can get waived off.