What to Look For When Buying a Used Car

Buying a used car can be tricky as you will have to consider lots of factors - it is therefore imperative that you know what you're looking for.

Trust is often a big issue when buying a used car, especially if you are buying privately. When viewing a car you will need to ensure that you check the vehicle over thoroughly. Here are a few tips to help make sure you buy a used car that won't give you too many problems.

1. Before viewing a car you should do some background research so you know the current 'going rate' of that particular car - you don't want to pay too much. You should also remember that when buying from a motor trader you have more rights than you do when you buy privately. It is therefore essential that you follow the tips outlined below.

2. If the car you are looking to buy is under three years old then it should have done around 25,000-30,000 miles, anything with a lower mileage is a good buy.
If it has done more miles then you know that the car has been driven hard which may have an adverse affect on the engine.

3. It is important that you inspect the bodywork to spot any blemishes. It is therefore a good idea to do this is daylight. You should look out for signs of rust as this indicated corrosion - rust is more likely to occur on cars over 5 years old. If you spot rust along the lower door sills, front wing or the bottom of the door alarm bells should ring. Rust shows that the metal is weakened and will require a lot of welding attention to put right. You should also look for signs of crash repairs - this is often shown by ripples in the paintwork.

4. Never buy a car without test driving it yourself. Make sure you are insured to drive it and then take it out on a drive.

If possible take it along a motorway, somewhere with twisting roads...and make sure you check reverse. This will give you a good feel of how the car drives. You will also be able to see whether the gears are sticky, the car pulls to one side or whether the clutch is stiff.

5. Finally, check that the mileage corresponds to the general wear and tear of the car. Also have a quick check of the condition of the engine - a dirty engine suggests that the car hasn't been looked after properly!

Car Loans at a Glance

The festival season is at the doorstep and the banks and financial institutions are competing against each other to offer a better car loan.

The Government banks are offering loans at lower rates while the private lenders are dangling higher loan-to-value proposition. To illustrate, we have the Canara Bank, IDBI Bank and ICICI Bank which had revised their car loan interest rates in August.

Canara Bank is offering a new scheme similar to State Bank of India’s (SBI) fixed-cum-floating offer in the home and auto segments. The SBI is offering 8 per cent for the first year, 10 per cent for the next two years, while Canara Bank is charging 8.5 per cent in the first year, 9 per cent in second year and 10 per cent between third and fifth year. Seeing this, both the ICICI Bank and IDBI Bank have cut their rates.

While the rate of interest is the most attractive feature of a loan, other issues such as structure (hybrid or fixed-cum-floating), loan-to-value on offer, tenure or time period and dealers’ partners need to be considered as well. These are some of things to consider for a consumer before opting for a loan.

A car loan seeker should approach the bank for clarity on these. Some financial institutions give relaxation towards initial down-payment and one can even avail a 0.5 per cent discount as well.

A car loan seeker should look for the cheapest loan for different tenures. If the loan is for three years, SBI emerges as the best bet. The bank’s offer of a fixed rate for three years makes it an attractive proposition. The average yearly rate comes to 8.87 per cent - the lowest.

In terms of Equated Monthly Installments (EMIs), a loan of Rs 3 lakh for three years would lead to an EMI of Rs 9,400 in the first year and Rs 9,592 in the second and third year. However, a car buyer has to fork out 15 per cent of the total cost as SBI lends only up to 85 per cent of the car’s value (on road price) for new as well as second-hand cars.

For loans with tenure of three-seven years, Canara Bank has the best offer. For instance, a car loan of Rs 7 lakh for five years would mean that the average rate is 9.2 per cent a year.

The EMI will work out like this - Rs 14,362 for the first year, Rs 14,638 for the second year and Rs 14,712 from third to fifth year. The only drawback is that Canara Bank does not provide four-wheeler loans for tenures above six years. The bank funds 90 per cent of a new car’s ‘on-road’ price. For used cars, loans are given only up to 75 per cent of the car’s value. In comparison, ICICI Bank’s EMI for the same loan would come to Rs 16,379 at an average rate of 14.25 per cent.

While offers of public sector banks are quite impressive, the process could be time consuming. This is because they follow a centralised loan approval system that leads to delays in sanction and disbursal. Also, they are more stringent as far as the loan-to-value percentage goes.

If the loan seeker is unable to shell out the required 85-90 per cent, approaching private banks through direct selling agents (DSAs) or dealers will help. In fact, some DSAs claim that they can get you a 100 per cent loan on select models.

Like mutual fund distributors, both dealers and DSAs normally have partnerships with as many as four-five banks. This helps them get you a better loan-to-value deal or even rates, at times.

Car purchase finance options

Financing a car purchase has become rather easy these days. In recent years, a whole lot of financing options have emerged for the potential car buyer. Here we list a few options.

Loan: One of the more famous ways of buying a car is through a car loan. In this case, the car bought through a loan is actually in the possession of the lending institution. The official term used here is “hypothecation” clause?, which basically means that though you own the car, the bank/lending institution is using the car as a security against the loan taken by you. Thus, once you have cleared all the dues, this clause is removed from the agreement.

The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.

Hire purchase: In this format, the lender actually buys the car on your behalf and sells it to you on hire purchase. In other words, you hire the car from the lender and own it once you have settled the dues.

The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.

Lease: In this case, the car is owned by the financier and leased out to you for a monthly installment, which includes both principal and interest payment. At the end of the lease period, you become the proud owner of the car and the financier transfers the car in your name.

The self-employed can get tax relief on the interest paid for the car loan. However, no depreciation can be claimed as the car is owned by the financier.

Car purchase finance options

Financing a car purchase has become rather easy these days. In recent years, a whole lot of financing options have emerged for the potential car buyer. Here we list a few options.
Loan: One of the more famous ways of buying a car is through a car loan. In this case, the car bought through a loan is actually in the possession of the lending institution. The official term used here is "hypothecation clause", which basically means that though you own the car, the bank/lending institution is using the car as a security against the loan taken by you. Thus, once you have cleared all the dues, this clause is removed from the agreement. The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.
Hire purchase: In this format, the lender actually buys the car on your behalf and sells it to you on hire purchase. In other words, you hire the car from the lender and own it once you have settled the dues. The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.
Lease: In this case, the car is owned by the financier and leased out to you for a monthly installment, which includes both principal and interest payment. At the end of the lease period, you become the proud owner of the car and the financier transfers the car in your name. The self-employed can get tax relief on the interest paid for the car loan. However, no depreciation can be claimed as the car is owned by the financier.

Old car or new?

This is totally dependent on your mentality. And of course, there is a price differential. So, it is better that you identify your needs first and then take a call on the one that suits your purposes.
For instance, if you are someone who is looking for a regular upgrade in say, every two-three years, then a second-hand car makes sense. Moreover, if this is your first car and you are trying to learn driving on it, a second-hand car definitely makes much more sense. On the other hand, if you are someone who is happy using the same vehicle for a number of years, then a new car is definitely recommended.
Of course, there are other important parameters like your negotiating skills and the previous owner. For instance, a Parsi owned car commands higher value as Parsis are known to maintain their cars very well. As a Parsi friend confesses, We do not believe in repair? we replace.? Whereas even the latest model in the hands of a Young Turk (a la Schumacher) would create imageries of burning tyres and engine on an overdrive.
Before buying any car, here are a few things you need to consider:
1. What is your budget for the car?
2. What is your monthly budget for the car?
3. How do you intend to use it? Within the city or even outside the city? (Heavy weight age towards the latter means that you need a MUV or multi-utility vehicle like Tata Sumo, Mahindra Bolero etc.)
4. How long do you intend to keep the vehicle? Now that you have answered the above, you know whether you want a new or an old car. But before you go for that old car, get yourself a cool car mechanic that is, a trustworthy one who will check the car for you. Ask him to check all the parameters like tyres, suspension, cooling etc.

Important clauses of auto insurance policies:

The vehicle insurance cover is not applicable if there is consequential loss, depreciation, wear and tear or mechanical and electrical breakdown. It is also not applicable in the following cases:
Drunken driving

Driver does not hold a driving licence

More people in the vehicle than the capacity permitted by the RTO

Damage incurred in a war zone.

Registering a new car at the RTO

Firstly, when you buy a new car, you have to register it with the Regional Transport Office (RTO). Remember that despite taking a loan from a bank, you are entirely responsible for the registration of the car.
Also, every car has its own Certificate of Registration (RC) book that tracks the history of the car. Moreover, as a car buyer, you need to ensure that all the legal forms should be filled in completely and submitted to the right authorities. Say, you live in Mumbai and bought a new car. You need to submit the relevant documents to the RTO under whose jurisdiction your address falls. If the new car is from another state, you will need to obtain a certificate of temporary registration from the RTO. In most places, this certificate is valid only for a very short period, after which a permanent registration number has to be obtained.
While driving the new car to the RTO for registration, take the following with you:
1. Application for new car registration or Form 20
2. Photocopy of the invoice, insurance policy, ration card or telephone bill as proof of address
3. Original Sale Certificate or Form No 23, Sales Tax Receipt, Octroi Receipt
4. Pollution Under Control Certificate from the manufacturer or Form No 22
5. Letter from the financier, in case you have taken a loan to purchase a car, addressed to the RTO asking them to endorse their lien on your car registration certificate book or Form No 34
6. Your PAN number.
7. Imprint of your car’s chassis number.

Repaying a car loan

One of the first things you need to look at while taking a car loan is the monthly installment, popularly known as the Equated monthly installment (EMI). While different banks would give you different quotes depending upon their rules and regulations, you must compare your monthly outflow for the same amount and for the same tenure. Remember that the effective interest rate is a function of the reducing balance method being used to calculate it. Reducing balance is the method of reducing the principal amount being repaid, from the outstanding loan amount. Every time you make a payment, the interest you pay is calculated on balance outstanding principal. Different banks can use different methods like:
Daily : In this method, the principal is reduced every day as if you were making repayment of the principal on a daily basis.
Monthly : In this method, the principal on which you pay interest reduces every month, that is, when you pay your EMI.
Quarterly : In this method, even though you keep on paying you EMI, the principal reduces only every three months.
Yearly : In this method, the principal is reduced finally, at the end of each year. This effectively implies that though you have paid back a part of the loan during the year, the principal outstanding gets reduced only at the end of the year. This simply means that the earlier the principal reduction is done, the lower the amount you will pay to the bank.
Nowadays, almost all banks offer the daily reducing method as it has more or less become a norm in the industry. However, it is better that one is aware of such things while going for a car loan.