Loan against Car | Use your car as collateral

Did you know that both a top-up and loan against your car are available at lower rates than personal loans? So if you need fast cash then take a loan against your car, even if you are not even a bank account holder!

It is not yet popular but a few banks and even non-banking finance companies (NBFCs) provide loans against cars – even used ones.

• HDFC Bank offers a product called – loan against cars.
• Kotak Mahindra’s car financing arm, Kotak Mahindra Prime, offers top-up loans to existing car finance customers.

Benefits:

• To bank: Banks find it cheaper to source business from customers whose credit profile they are already comfortable with.
• To customers: Customers find the rate of interest cheaper than that of a personal loan.

Disbursals

• Kotak Mahindra Prime’s rate of interest is 11–14%, depending on the loan amount and repayment history,
• HDFC Bank offers loan against cars at 16% reducing balance. These loans can be compared to personal loans which are unsecured loans and most banks charge over 16% for such loans.

Customers may be offered up to 85% of the car’s value but the valuation is dependent on the bank. Valuation depends on the car’s

• age,
• condition and
• the depreciation value that increases with age,

to arrive at the current value. Thus experts refrain taking a loan against old cars as the value of the loan will be restricted to the value of the vehicle.

In case of a top-up loan, the amount disbursed is related to how much of the ongoing loan has been repaid by the customer. While Kotak Mahindra Prime offers higher top-up amounts if the number of equated monthly installments paid is high, HDFC Bank deducts the amount due on existing car loan customers and then disburses the new loan; somewhat like a refinanced loan.

One cannot sell the car against which a loan is taken. The lien is marked on the customer’s certificate of registration (the RC book), an important documentary proof of ownership, at the regional transport office (RTO). This would restrict sale of the car until the hypothecation is removed. One needs to obtain a no-objection certificate from the bank and give it to the RTO before proceeding to do so.

Even a person availing a top-up loan in the fifth year of his existing car finance loan will have to wait for an additional three years before he can sell his car. Three years is the maximum term for such top-ups. It would work best if you avail of the top-up while still in the early part of the car finance loan.

Choices
For those looking for quick cash, there are options. However, the rates for loans against property (12-15%) and shares up to Rs 10 lakh (11–16%) may be approximately the same that you need to pay for the loan against your car.

But the point is borrower’s credit history is not an important factor when opting for loan against gold, blue chip shares and property, since the collaterals have higher value.