The Indian auto finance sector is growing rapidly, with used-car loans leading at a 26.2% annual growth rate. While this shift towards formal credit and higher-value vehicles is significant, investors should note the higher repayment risks in the used-car and commercial vehicle segments.
India’s vehicle finance market is undergoing a notable transformation, driven by a rapid rise in the popularity of used-car loans. Between June 2021 and June 2026, the used-car loan segment grew at a compound annual growth rate of 26.2%, significantly outpacing other auto finance categories. This shift indicates that more consumers are moving away from informal borrowing and relying on formal bank or non-bank financing for pre-owned vehicles.
Access to Credit and Premiumization
The expansion is fueled by first-time borrowers entering the formal credit system. Approximately 75% of used-car loan originations in the first quarter of fiscal year 2027 were issued to people who had never taken such a product before. Two-wheeler loans continue to act as a primary gateway for this financial inclusion, with the borrower base in this segment increasing to 3.6 crore by June 2026, up from 2.3 crore five years prior.
There is also a clear trend toward premiumization, or buying more expensive vehicles. The average ticket size for new auto loans climbed to ₹8.6 lakh in the first quarter of the 2027 fiscal year. Loans exceeding ₹15 lakh now account for 29.8% of the market, compared to 27.6% just two years earlier. This movement toward higher-value financing suggests that urban and semi-urban consumers are upgrading their vehicle preferences.
Risks and Delinquency Trends
While the sector is growing, it carries specific risks that investors should monitor. Data shows that used-car loans have a delinquency rate of 3.1%, which is higher than the 2.1% observed for new car loans. In simple terms, borrowers are finding it slightly more difficult to repay loans for used cars compared to new ones.
The commercial vehicle segment, which has grown at a 20.1% annual rate over the last five years, is facing its own set of challenges. This segment currently reports an early-stage delinquency rate of 4.1%. Additionally, there is a rise in leverage, as 19.9% of commercial vehicle borrowers now manage two or more active loans, up from 15.7% in 2021. This increase in multi-loan exposure can place financial pressure on borrowers, potentially impacting their ability to service debt.
Going forward, the financial health of the vehicle finance sector will depend on how well lenders manage these risks in the used-car and commercial segments. Investors may track credit quality reports and management commentary from lenders for updates on repayment trends and how they plan to balance aggressive growth with maintaining low delinquency levels.