A new form of financing known as loan against a vehicle is quickly gaining popularity. Typically, a loan is available for the purchase of a vehicle, but banks now also offer loans secured by an existing vehicle. This opens up a new avenue for raising funds for an individual.
Since this is a secured loan, the interest rates are also favorable. While banks do not actively market this loan, HDFC Bank, Kotak Mahindra, and a few others provide it. If you already have an auto loan, it functions similarly to a top-up loan.
This loan's interest rates begin at 13.5 percent for HDFC Bank and 14 to 14.5 percent for Kotak Mahindra Prime. If the vehicle used as collateral is old and has a low market value, the interest rate may reach 17-18%.
However, the rates are lower than those of personal loans. In the case of a top-up loan secured by a vehicle, disbursement is also expedited. The same documentation requirements apply to all loans. For example, HDFC and Kotak Prime disburse this supplementary loan in two to three business days. The collateral is pledged for the duration of the loan.
In contrast to other assets, such as a house, that can be used as collateral for a loan, the value of the automobile will decrease, and the bank will therefore assume a different type of risk. As the lender has already established a relationship with the customer and is familiar with the client's information, some banks will only lend to existing customers who have previously taken out a car loan.
On average, the bank will lend you between 70 and 80 percent of the car's current market value. The automobile need not be brand-new. One can obtain a loan against a used vehicle. However, if you take out a loan against a vehicle that is older than a year, your vehicle will be worth less and you will receive a smaller loan. Typically, the value of a car depreciates the most during the first year.
HDFC Bank does not provide collateral loans for vehicles older than six years for private vehicles and seven years for commercial vehicles. The maximum loan term is sixty months, depending on the age of the vehicle."""