Valuation an issue:
Roughly four million used cars are sold in India every year. “The average loan size is Rs 3 lakh. But less than five per cent get organised finance,” says Vinay Sanghi, founder and chief executive officer, CarTrade.com. By contrast, about 85 per cent of new cars are purchased through organised financing. The big stumbling block for banks is getting an accurate estimate of value in the case of used cars. “One reason why finance is not available is that banks and NBFCs don’t understand how to price the loan. In used cars, you need to understand the condition, documentation and the price of the car because at the end of the day, it is hypothecated to the lender. Lenders’ don’t understand how to collateralise the car,” he says.
Proper documentation essential for loan:
The key challenge for borrowers is to ensure the correct documents for the vehicle are all available, such as registration certificate and valid comprehensive insurance. Apart from this, the customer also needs to check on the valuation, age of the vehicle and model, and demand in the market. Says Ramesh Iyer, vice chairman and managing director, Mahindra & Mahindra Financial Services: “The customer also needs to have income proportionate to the desired loan. Usually, the car valuation is benchmarked to the blue book valuation, Insured Declared Value (IDV) fixed by the insurer or valuation certified by authorised valuers.’’
Lenders are more comfortable if the car is being purchased from an organised player. The creditworthiness of customers of used cars is not very different from that of new customers and lenders apply standard recovery processes, as applicable to any other retail loan product.
CarTrade has launched a pilot project in five cities where it has tied up with banks and NBFCs to provide financing for used cars. CarTrade’s service desk does the condition, valuation and documentation check for its customers. Even if the car you are buying is not registered on CarTrade, you can get a loan throughthe platform.
Loans more expensive than those for new cars:
The rate of interest on loans for buying used cars is 13.5-15 per cent or more, depending on the customer’s creditworthiness. The loan to value ratio also depends on the customer’s income eligibility to some extent. Interest rates on used car loans are at least two percentage points higher than the rates for new car loans. For new cars, the rate is usually 10-12 per cent. “The loan requirement is usually channelled by the organised or unorganised dealers/brokers to the lender. The lender assesses the credit risk on the customer by taking into consideration his income level, asset quality (valuation), age, ownership type, etc. The vehicle is hypothecated by the lender as a collateral for the loan,’’ explains Iyer.
The price of a used car depreciates more slowly than that of a new car. “The moment you drive a new car out of a showroom, its value depreciates by about 25 per cent. But since a used-car is already used, the depreciation rate is much lower. Globally also the penetration of used-car financing is very high. In India banks are not comfortable with collateralisation of the asset; the segment is slow to pick up,” explains Sanghi. In India, many customers buy used cars by taking personal loans, which are more expensive (being an unsecured loan), and rates can be as high as 20 per cent plus, he adds.
Tips for buying a used car
Most lenders give a loan only for certified cars, hence it is advisable to buy from a branded and certified player
Some lenders don’t give loans for vehicles, which are more than seven- or eight-year old
Valuation of the car depends on the condition, number of years and distance covered
Vehicle’s make, model, variant and any history of being involved in an accident also impacts valuation