While acquiring a used car is a budget-friendly option, the approval of a loan is uncertain. The financial status of the borrower, the condition of the vehicle and other factors are evaluated by the lender before making a loan decision.
In case you are applying for a used car loan in Kerala, it is essential to understand the factors involved so as to boost your chances of loan approval. This article looks at the key factors lenders generally weigh when assessing an application.
What Lenders Actually Look At
Loan approval is not based on eligibility alone. Lenders evaluate the strength of the application on paper, such as your income, current financial obligations, deposit for the car, vehicle information, and the desired loan conditions.
For eligibility criteria and who can apply, see our Used Car Loan Eligibility guide.
Credit Profile
A lender considers the applicant’s credit profile when evaluating their repayment capacity. A record of responsible borrowing and repayment will help the case, but the decision will depend on the entire profile and not one of its components.
Earnings and Work Power
Having a secure and well-defined income increases the lender’s trust that you will be able to repay the ongoing EMI burden and also satisfy your other repayment obligations.
Proving Steady Income
A stable income can demonstrate the ability to repay loans. A salary certificate, tax returns and bank records can indicate to the lender that the applicant has regular income.
Length of Employment or Business Activity
A long duration of work experience or business activity may also contribute to increased confidence of the bank.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio allows you to compare your existing liabilities with your income. This enables lenders to determine your capacity for taking on new debt responsibilities.
Impact of Existing EMIs on New Loan Approval
If you already have existing monthly EMI obligations, the amount of income left over for new repayment will be lower. A higher DTI may result in the rejection of your new loan application due to increased risks involved.
Down Payment & Loan-to-Value (LTV) Ratio
The contribution that you provide with regards to the vehicle affects the size of the loan and the risk the lender takes. The specific requirement changes depending on the lender, vehicle type, and the person who applies for the loan.
Why A High Down Payment Benefits Chances of Getting Approved
When paying a high down payment, the amount borrowed diminishes and, thus, lowers the risk taken by the lender. According to the lender and the applicant’s profile, a typical contribution ranges from 15%-30% and more.
LTV in Simple Words
LTV means a relation between the amount of the loan and the estimated value of the vehicle. A smaller LTV indicates that borrowers are using less of the car’s value.
Factors about your car
The car is an important factor for lending a loan for used cars. The lender will examine the car in order to determine if the car provides adequate security for the loan.
Vehicle Condition
Used cars that are old and have high mileage may be associated with stricter lending rules because of uncertainty surrounding useful life and resale value of the vehicle. Hence, the condition and age of the vehicle will impact the loan amount.
Car Make, Model and Resale Value
The car make, model and demand can play an important part in what the car can get at resale time. Cars which are well-known and have predictable resale value are viewed by banks as less risky.
Obtaining an Accurate Estimate for Car Finance
An estimate in car finance offers you a glimpse into the anticipated price of the vehicle, amount of money that you can obtain as a loan, and EMI amount. You can save yourself from borrowing more than what you can afford by checking these values beforehand, as it also helps in preventing wrong applications.
You can easily and quickly fetch an estimated amount by using an eligibility calculator or an EMI calculator, however actual figures will be dependent on lender’s assessment.
Loan Period and EMI Planning
Loan tenure influences both the EMI and total cost of borrowing. Choosing the period that goes well with your income and responsibilities is an important part of making plans for your used car.
Comparison of Shorter and Longer Loan Periods
In case of shorter tenure, monthly EMI payments will be higher, but the total interest paid will be lower. In case of longer tenure, EMI will be less, but total interest for the loan will be more.
Types of Interest Rates
Your repayments may also be impacted by the kind of interest rate system.
Fixed Rate vs. Floating Rate
If you have a fixed rate, the interest rate stays constant as per the loan agreement. On the other hand, floating rates depend on the underlying benchmark/lending rate. For instance, if it changes according to the RBI repo rate.
For someone applying for a used car loan, fixed rate loan would prove better as it enables ease of calculation of your EMIs, while floating type works for those comfortable with fluctuations in repayments.
Lender Type: Bank vs. NBFC vs. Dealership Financing
While banks, NBFCs and financing through a dealership differ in various ways including aspect like time taken for approvals and documents requirements, banks tend to have structured procedures while NBFCs offer more flexibility to certain profiles.
Current Relationship with the Lender
Having an existing relationship with a financial institution can make the assessment process much easier, as the lender is familiar with the borrower’s payment pattern and financial record.
Checklist to Support Your Application
➙ Confirm your car finance estimation before making an application.
➙ Keep your DTI within limits.
➙ Prepare for the required amount of down payment.
➙ Select a realistic loan duration according to your repayment ability.
What This Means for Your Loan Approval
Approval of a used car loan in Kerala depends on a number of interrelated variables, including income stability, current EMIs, the down payment amount, the vehicle characteristics, the duration of the loan, and the loan structure. However, the eligibility or the credit profile alone does not drive the final decision.
To learn more about the procedure, consult our Used Car Loan Eligibility and How to Apply for a Used Car Loan guides. Option Credits Services Pvt Ltd is available to help find suitable alternatives across banks and NBFCs.
FAQs
What is the most important factor in used car loan approval?
There is no single factor that guarantees approval. Income stability, existing financial commitments, credit profile, down payment and the vehicle all contribute to the lender’s assessment.
How much down payment do I need for a used car loan?
The amount varies by lender, vehicle and applicant profile. A higher down payment can reduce the amount borrowed and the lender’s overall exposure.
Does the age of the car affect loan approval?
Yes. Older vehicles may face stricter lending conditions because their remaining useful life and resale value can be less predictable.
Can I get a used car loan approved with existing EMIs running?
Yes, depending on your income and existing repayment commitments. However, high existing EMIs can reduce your capacity for an additional loan.
What is a car finance estimate and why does it matter?
A car finance estimate gives you an indication of the vehicle cost, potential loan amount and projected EMI. It helps you assess affordability before submitting an application.
Is it easier to get a used car loan approved from a bank or an NBFC?
Neither is automatically easier for every borrower. Approval depends on the lender’s policies and how your financial and vehicle profile fits those requirements.
Does my credit score affect used car loan approval?
Yes, your credit score is one of the factors lenders may consider. However, the final decision is generally based on your overall financial profile.
What documents do I need for a used car loan?
Document requirements vary between lenders and applicant profiles. The lender will confirm the specific documents needed during the assessment process.
