What Is A Car Loan?
(Let’s break it down for you)
If you are a first-time car buyer, you are perhaps a little nervous about getting the Car Loan process right. Well, in that case, you have come to the right place. Whether you are looking to upgrade from a two-wheeler to a four-wheeler or just want to add another mean machine to your bevy of cars, this comprehensive guide will demystify Car Loans for you.
Let’s begin with the basics. A Car Loan, also known as an Auto Loan, is a mode of financing the purchase of a car – but then, you already knew that, didn’t you? It is a short to medium term loan given at affordable rates of interest. This is also a secured loan – meaning the car you are itching to buy will be the asset against which a lender will sanction the loan. So, if you outrageously default on your loan, the bank will take away your four-by-four and sell it to recover their losses. But we trust that you’ll pay your dues on time.
To this end, a number of financial institutions in India offer Car Loans at varying interest rates. Other than banks, non-banking financial institutions and car dealerships too offer Car Loans. You can take this loan to fund any brand or make of car – economical hatchback, svelte sedan, handsome SUV… there are tons of options.
Types Of Car Loans?
(The classic battle of old vs. new)
When you think of a Car Loan, you probably think of banks first. That is the first door we knock on when a financial need surfaces. This is not to say that there aren’t other ‘willing to help’ institutions in existence. Many non-banking financial institutions and car dealers also extend car financing schemes to those seeking it. Once you have found your underwriter, it’s time to look at different types of Car Loans on offer.
Car Loans are classified based on the type of car you are looking to purchase. Are you going for a brand-new car or picking up a pre-owned machine? Let’s place the different loan options under the loupe.
- New Car Loan: All of us, at some point in our lives, have worn clothes that once belonged to our siblings. Some of us, perhaps, do that even today. While hand-me-downs were great, our favourite bits of clothing usually always came from the stack that was exclusively purchased for us.
As with clothing, so it is with a car. Nothing like rolling out in a brand-new Swift or i20 from the showroom after months of waiting. That feeling of gratitude is dizzying. Lenders also like this, since the chances of wear and tear in a new car are negligible compared to a pre-owned car. New Car Loans are available for almost all cars in existence – irrespective of the make, brand and price range. If your budget can accommodate the car of your choice as snugly as your chosen car accommodates you, no lender will withhold the loan from you (provided all other requirements are met as well, of course).
- Used Car Loan: Though there are a lot of people who prefer to purchase cars firsthand or brand new, there is a thriving market for those who don’t mind kick-starting their driving experience with a secondhand car. A secondhand car is a good way to hone your driving skills (or defensive-driving skills) on our rather challenging Indian roads. Once you are confident enough about your prowess behind the wheel without getting involved in a fender bender, you can go for a shiny, brand-new car.
Hence, a Used Car Loan is designed to meet the needs of all secondhand car lovers. Other than first-time drivers, secondhand Car Loans are also sought by car connoisseurs who wish to buy out-of-production classic pieces or collector’s items from others. A Used Car Loan is also helpful for those who wish to change cars almost as frequently as they change clothes. To cater to this market of secondhand car aficionados, banks and other financial institutions provide a range of Used Car Loans for the purchase of pre-owned cars.
The requirements and criteria to get a Used Car Loan are essentially the same as that of a new Car Loan. However, Used Car Loans come with one condition. There is often a cap on the age of the secondhand car you wish to purchase. Many lenders set the age bar at 60 months or 5 years old. Any car older than this is not looked upon favourably. The value of cars depreciates with time and financial institutions don’t want to risk their money on something that will demand a lot of care and maintenance money beyond a certain number of years. Keep this condition in mind when you go to purchase a pre-owned car.
Another factor you must be careful of with a secondhand car is the condition of the car. It might look sassy and smooth initially, but look under the hood thoroughly. Even if it’s a secondhand car, you don’t want any unpleasant surprises. Moreover, lenders will have your car examined before sanctioning a Used Car Loan. If they find the car is well-maintained, the loan will be extended easily, but if something looks fishy, you may be asked to restart your search.
- 100% Car Loan: Sounds lovely, isn’t it? A 100% Car Loan is one which completely funds the ex-showroom price of the car you wish to purchase. Needless to say, this loan is applicable to the purchase of brand-new cars only. To understand this loan category clearly, it’s important that you know the difference between ex-showroom and on-road price of a car. The next section explain this difference in details. On-road price of a car is usually 10% or more than the ex-showroom cost. So when we say 100% Car Loan, keep in mind the difference between the ex-showroom and on-road price of a car.
Understanding Car Prices – Ex-Showrom And On-Road
(Comparing apples with oranges)
If you are looking to purchase a brand-new car, you will come across words like ‘ex-showroom price’ and ‘on-road price’. Look at the fine print in any car advert in the newspaper. You’ll see a mention of either one of these words. Let’s clear up the difference for you:
- Ex-showroom Price: Ex-showroom price is the cost car dealers pay to purchase a car from its manufacturer. It is inclusive of excise duty and, in some cases, octroi duty. Excise Duty is the cost a dealer pays to the state government to procure a vehicle from the manufacturer. Octroi Duty is paid to the local authorities to bring a product from one region to another. Octroi may or may not form a part of the ex-showroom price of the car. The ex-showroom price is lower than the on-road price of a car. Did you know ex-showroom prices of cars are higher in Bangalore and Mumbai than in Delhi? This is why it’s cheaper to purchase a car in Delhi.
- On-Road Price: This is the final price of the car, the one at which it is sold by the dealer to the buyer. On road-price is about 10% or more than the ex-showroom price of a car. Many costs and charges are added to the ex-showroom price of car before the dealers arrive at the on-road price. Let’s look at these costs and charges:
- Road Transport Office (RTO): All buyers must pay a certain price at the RTO to purchase a car (sounds dictatorial, doesn’t it? But not so much). What you are to pay to the RTO is the Road Tax, which is determined based on the cost of the car and the fuel it uses, the registration fee, and a fee to obtain the number plate. While the registration and number-plate fees are not too big, it’s the road tax that will pinch you a little.
- Insurance: Getting Car Insurance is a must in India and dealers often include it in the on-road price of the car. You can always opt out of the insurance offered by the dealer and pick something from the market of your own choosing. Insurance plans offered by dealers may not be the most economical. Tip: Save a few thousands by comparing and buying Car Insurance plans online. You’ll find something to suit your budget and also a plan that will give you better cover at a lower premium. An effective strategy to reduce the purchase price of your car.
- Optional costs: This refers to the price of add-on features in a car that you may opt for e.g. accessories, customisation, extended warranty etc.
When applying for a loan, keep in mind the on-road price of your car to best gauge your loan amount requirement.
The Car Loan Process
(This is how it rolls!)
This section will give you a step-by-step breakdown of the Car Loan process. We’ll handhold you through each step of the loan process so that you get your loan without a slip.
- Stage 1 – Deciding To Avail A Loan: This is the stage at which you assess your funding requirement for a car. You have paid the booking amount to the dealer and it’s due to be delivered soon. Go online and search for the ideal Car Loan by comparing the various options available in the market. It’s important to know at the very beginning the amount of loan you need to fund your car purchase.
- Stage 2 – Applying: Once you have found a Car Loan best suited to your needs, you apply. Fill out the relevant application forms, duly signed with photographs, and submit it with supporting documents. You will need age, income, and address proofs, among other documents to complete the submission process. You’ll also have to provide a pro-forma price statement of the car to be funded. It is an estimation of the loan amount you need. We’ll cover, in-depth, the documents you need for a Car Loan in a later section.
- Step 3 – Processing: After you submit your application, the lender will check your eligibility and Credit Score and inform you whether or not a loan can be extended to you. If approved, the lender will lay down the terms of the loan specifying the loan amount and interest rate applicable on it. If you agree to it, you’ll need to sign a loan agreement. After this, you can make your down payment to the dealer and provide post-sanction documentation to the bank i.e. RTO papers and standing instructions to debit your bank account for payments. Once the paperwork is done, the loan is disbursed. Keep in mind, lenders will charge a processing and documentation fee to sanction your loan.
- Stage 4 – Utilising: Unlike a Personal Loan, the loan amount is not credited to your account to be used at your discretion, but is directly credited to the account of your car dealer. When you avail a Car Loan, the car being purchased is hypothecated to the lender. Which means, you pledge your car to your lender. This is done by an endorsement in the car’s registration certificate (RC). The endorsement is required by the lender in order to prevent a sale of the car while you still have an outstanding balance on the loan. The car acts as a form of security to the lender.
- Stage 4 – Repaying: Once the loan has been sanctioned and released, you will have to start the repayment cycle. This is mostly done through EMIs, keeping in mind a repayment schedule. You may repay the loan through cheques or via standing instruction on your bank account. You may also opt to repay the loan early i.e. prepay or foreclose your loan. However, prepayment facility doesn’t accompany all Car Loans. You might have to request your lender to add this clause to your loan agreement. If you wish to sell your car before the end of the loan term, you will have to foreclose the loan first. At the end of the loan tenure, if all payments have been made, your loan account is closed.
- Stage 5 – Final Details: The car belongs entirely to you after you repay the entire amount due towards your Car Loan. But to ensure there are no encumbrances, you will have to get a No Objection Certificate (NOC) from the lender as proof of having repaid the loan and present it to the RTO to have the hypothecation removed. Present it to your car insurer as well. Ideally, your lender provides an NOC as part of closing documentation, but it’s always better to follow up on this detail soon after the last EMI. Delays in having the hypothecation removed could complicate matters, especially if you wish to sell the car or make insurance claims on it. Remember, the lender is the owner till the hypothecation is removed.
Features Of A Car Loan
(The personality traits)
When you go scouting for Car Loans, the sheer number of offers can leave your head spinning. This section will list out the many features of a Car Loan to save you from getting lost in the sea of many Car Loan offers.
- Coverage: Coverage indicates whether funding will be available or not for the car you wish to purchase. No matter whether it’s a secondhand car or a brand-new one, make sure to purchase it from an authorised dealer. This will boost your chances of getting a Car Loan.
- Loan Amount: This is an important aspect for all kinds of loans. The loan amount is the total sum a lender is willing to sanction to help you purchase a car. Your loan amount is based by the sum you need to purchase your car and your eligibility for that sum. If you look at a car that is clearly beyond your means, the lender might not give you as much as you need. Your creditworthiness i.e. your ability to repay the loan will also play a big role in determining the loan amount sanctioned to you. Lenders will determine your creditworthiness based on your Credit score and credit history. The better your Credit Score, the more creditworthy you are.
- Down-payment/Margin: Lenders do not fund 100% of the on-road price of a car. In the best-case scenario, they will fund about 90% of that price. You’ll have to pay the balance from your own pocket and it’s called ‘down payment’. Although some lenders also fund 100% of a car’s on-road price, they do so at a higher rate of interest. Talking about down payment, there is no maximum limit to it. Some dealers might expect a minimum 10-15% of the on-road price as down payment, but you can choose to raise it if your budget permits. More down payment means less loan amount, which translates to fewer bucks paid toward interest.
- Loan-to-Value Ratio: This is the ratio of the amount a lender is willing to sanction against the total value of the car to be purchased. Most lenders in India provide a LTV of 80-85%. This means they will fund 80-85% of the on-road price of the car. As a rule of thumb, lenders consider the ex-showroom price of a car to calculate LTV. In simpler words, loan amount sanctioned to purchase a car essentially hinges on the ex-showroom price of the car.
- Interest: When you take a loan, lenders charge you a certain interest on it. It’s the same with Car Loans. The interest rate on a Car Loan depends on two factors viz. a lender’s Prime Lending Rate (PLR) and the premium they’ll charge over it. There are many factors that influence the final rate of interest on a loan. Some factors are the lender’s own liquidity requirements, market conditions, and interest rates offered by competitors. From a customer’s viewpoint, a lender also factors in a borrower’s creditworthiness. The lower a customer’s creditworthiness, the higher the interest rate, and vice-versa.
Now, there are two types of interest rates – fixed and floating.
Fixed Interest Rate: A fixed rate of interest will remain same throughout the loan tenure. No matter the market conditions, you will pay the same rate of interest on your loan. Psst… If Car Loan interest rates, at the time of availing the loan, are trending low, go for a fixed rate of interest. This way you lock-in a lower rate irrespective of future changes in the economy. However, if interest rates fall further after you avail a Car loan, you lose out on the benefit. The advantage of opting for a fixed rate of interest is that it allows you to plan your finances more efficiently. This is because your EMIs will be of the same amount with a fixed rate of interest.
Floating Interest Rate: Interest rates fluctuate from time to time in response to market conditions. When you opt for floating interest rate, you will pay differing rates of interest on your loan throughout the tenure. If the interest rates go up, you pay more and vice-versa. If Car Loan interest rates are high at the time of availing the loan, it’s advisable to opt for floating rates. If rates fall, you’ll reap the benefits. Opting for floating interest rate requires that you to track your loan repayments schedule regularly, as your EMIs will change with every change in interest rate.
- Repayment: Repayment of your Car Loan is usually done in the form of EMIs (equal monthly instalments) i.e. the total loan amount payable is divided by the loan tenure (total months) and the result is the amount you will repay every month towards your loan. The shorter the tenure, the higher the EMI and vice-versa. However, keep in mind, longer tenure also mean more money paid towards interest.
You can pay your EMIs to the lender either through direct electronic transfer or via post-dated cheques. Many lenders allow you to change the method of payment from one to another during the course of the tenure. You can also speed up the repayment of your Car Loan by making additional payments (part payment) or by paying up the full outstanding at one shot. Now what is part payment? A part payment allows you to pay more than the set EMI amount. Keep in mind, early closure of your loan may come with an extra fee (commonly called a pre-closure penalty or foreclosure fee).
- Eligibility: The eligibility criteria are markers that a bank uses to determine whether to process your loan application or not, and how much loan amount to sanction in case of approval. Let’s look at the eligibility criteria, one at a time.
- Documentation: You have to submit documents to validate proof of your identity, address and income. This helps lenders assess your financial standing. Failure to produce the relevant documents can lead to a rejection of the loan. So careful with this one! Remember, document requirement will vary depending on whether you are a salaried or a self-employed professional.
- Income: Your income levels, present and prospective, determine your loan-repayment capacity. Lenders consider your take-home salary, or the salary that comes to your account after the deductibles, to ascertain your repayment capabilities. The more you earn, the stronger your repayment capacity. This reduces the risk of lending to you and allows lenders to approve larger loan amounts.
- Employment: Your employment plays a major role in determining your eligibility. Based on your employment status, lenders broadly classify borrowers as salaried, self-employed, firm, private company, Trust, AOP, HUFs. In general, self-employed individual are considered riskier bets than salaried employees. This is because the income of self-employed individuals may vary from time to time. Salaried individuals, on the other hand, are sure to earn a fixed sum monthly.
- Credit Score: Your Credit Score indicates your creditworthiness. It is a number which summarises your credit report. Now, what is your credit report? It is a record of your past credit transactions and financial behaviour. All lenders check your Credit Score before approving your loan application. A good Credit score, usually 750 and over, can lead to a speedy approval of your loan (provided you meet all the other eligibility criteria).
- Existing Loans: Unless you have strong loan servicing capabilities, outstanding loans reduce your eligibility for a Car Loan. Repaying two or more loans concurrently increases the risk of lending to you. This may prompt lenders to sanction a smaller amount, or reject your application altogether.
- Guarantors: Sometimes, the lending institution may ask you to nominate a guarantor for your loan. A guarantor is a person who can sign for the loan along with you and take responsibility for repayments should you fail to do so. This is a requirement that may be implemented at the discretion of the bank. It’s not a mandatory requirement. If you have a weak Credit Score or are lacking in any other criteria, the presence of a guarantor can strengthen your loan prospects.
- Age: Yeah, age! Age is an important factor that determines your eligibility for a loan. Most institutions, in general, will consider approving loans for individuals between the ages of 21 years and 70 years.
- Existing Relationship With A Lender: When you are in a pickle, who do you contact first? Your family and friends. This is because they know you, understand you and are aware of your history. With so much known, there is less explanation to do and help is easily received. Same goes for the bank. Have you been loyal to one bank through and through? Well, approach them for a Car Loan. They know your credit history and behaviour as intimately as your best friend (or perhaps, even better). Hence, they can cut you a good deal on a Car Loan.
- Tenure: Car Loans are usually offered for a maximum tenure of 5 to 7 years. Depending on the lender, the term can be extended to a few more years as well. Generally, the longer the tenure, the lower the EMI. But it is also important to note that the longer the tenure, the higher the total interest payable. Remember, your car is a depreciating asset i.e. the value of your car decreases every year. If you take too long to repay your loan, the interest and the principal repaid to the lender will be more than your car is worth.
- Fees & Charges: These are certain non-interest charges that are a part of the cost structure of a loan. Some of these charges are paid upfront, while others are paid when a certain service is availed. For example, processing fees and documentation charges are paid upfront when taking a loan, while prepayment penalties or charges for switching repayment methods are paid if the service in question is availed.
- Prepayment: Lenders may or may not allow prepayment on the Car Loan or may do so at a cost. Some banks charge a small fee on complete or partial prepayment on the loan if the same happens in the initial few years of the loan. Once the initial years go by, prepayment is allowed for free. If you are looking at part-payment, check with the bank about how often can you make them. The trending norm is two part-payments during the loan tenure and one in any given year. This is subject to change from lender to lender.
What is the pre-payment fee structure?
If you completely prepay your loan, the lender might charge a certain percentage of the outstanding amount as fees. If you are looking to make part-payments, then the lender could charge a certain percentage of the pre-payment amount. However, it’s wiser to know the deal directly from the lender rather than making assumptions.
Documents Required To Avail A Car Loan
(The magic is in the paperwork)
To be able to process your Car Loan request, lenders will ask for several documents. Documentation requirements vary from lender to lender and from applicant to applicant. Nonetheless, here is a general list to help you prepare in advance.
|Signed Application Form
|This is the first and most obvious thing that you will be required to submit. It will ask you for some basic details.
|KYC Requirements (Salaried, Self-employed, non-individuals
|To prevent fraud and know who their lending to, lenders have a legal obligation to fulfil Know Your Customer (KYC) requirements. This includes obtaining the following identifying documents.
Proof Of Identity/Age: PAN, Aadhaar, Passport, Driver’s License, Voter’s ID, Ration Card
Proof Of Address: Rent/Lease agreements, Utility Bills, Ration Card, Verified Bank Statements, Employer’s Letter
Photographs: Latest passport-size, in colour.
These requirements vary for business persons, companies, and other non-individuals.
|Proof Of Income
· Latest Salary Slips
· Employment Letter
· Bank Statements for your salary account
· Latest Form 16
· Audited Income Statements
· Bank statements
· Tax Statements,
· Business Continuity Documents
Psst… In case you missed us saying this earlier: The documentation requirements will vary from bank to bank. The above is an expansive list for your reference. You’re welcome.
Car Loan Repayment Schedules And Interest Calculation
(By the clock, tick-tock!)
When talking about car loan repayment there are two things you must keep in mind. The first is the EMI and the second is the amortisation schedule. An EMI is the monthly payment that you will make towards the loan, while the amortisation schedule tell you the interest and principal component of your EMI at varying stages of the loan.
- The EMI
A Car Loan is made up of three main components and these components work together to determine your EMI.
- The first component is the amount you borrow
- The second is the interest rate
- The third is the processing fee for the loan and other ancillary fees
(The processing fee can be a small percentage of the amount borrowed)
These three components put together will determine the total amount that you need to repay.
- Amortisation Table
Now that we know how EMI is calculated, we also need to look at how EMIs work. It’s not rocket science, no worries. Interest and principal amount make up different components of your EMI at different stages of your loan tenure. An amortisation table gives you information about these components.
- The first few years are the ones where a sizable chunk of the repayments are paid towards the interest due.
- The chunk paid towards the interest keeps reducing over the years, and as time progresses, the lion’s share of the repayment will be dedicated to paying back the principal amount.
- In the first few months, almost 40-45 per cent of the amount you pay will be taken to clear the interest.
- In the last few months, the EMI will have a very tiny interest component.
Let’s understand the nature of EMIs and the amortisation schedule with the following example.
Example: Say, you are looking to purchase an SUV which costs Rs. 30 Lakhs. Of this Rs. 30 Lakhs, Rs. 24 Lakhs is the ex-showroom price and the remainder is the RTO and insurance cost. The lender you approach tells you that they will sanction 100 per cent of the ex-showroom price at an interest rate of 9.85% per annum and a processing fee of 2%. This calculation will translate to:
- Loan amount =Rs. 24,00,000
- Interest =Rs. 7,88,209
- Processing fee =Rs. 48,000
The sum of the three components is Rs. 32,36,209 – the total amount you need to repay your lender. Your EMI, assuming you have taken the loan for a tenure of 6 years, will be Rs. 44,281.
With the numbers laid out clear, let’s look at how the amortisation table works.
- Your monthly EMI will stay fixed at Rs. 44,281, assuming you have opted for a fixed rate of interest.
- Out of your first EMI, Rs. 24,581 will go towards repayment of the principal amount and the balance Rs. 19,700 will be interest recovery.
- This trend will continue till most of the interest is repaid and a larger chunk of the EMI goes towards principal repayment.
Car Loan Interest Rates
(Under The Loupe)
To assist you with your Car Loan search, we have put together interest rates from almost all banks in a table below.
|Axis Bank Car loan
|9.85% to 12%
|Dena Bank Car loan
|Federal Bank Car loan
|HDFC Bank Car loan
|9.35% to 11.60%
|ICICI Bank Car loan
|9.50% to 10.75%
|L&T Finance Limited Car loan
|11% to 12%
|Yes Bank Car loan
|11.25% to 13.50%
Note: These are interest rates applicable at the time of this writing. We recommend that you check the bank’s website for the latest rates.
Car Loan Tax Treatments Or Benefits
(Something we all fancy)
When you take a loan, you are often given some tax benefits. However, this is tricky with a Car Loan, since it’s considered a luxury item. But it might not be so tricky if the car is purchased in the name of a business entity or by a self-employed professional. Let’s look at it in detail.
Individual: There are no tax benefits offered to individuals when it comes to Car Loans. Sorry, tough luck is all we can say.
Businesses: Businesses, well, you’ve got something to gloat about. If a car is purchased in the name of a business, tax sops are available on the interest paid and on the depreciation of the car. With regards to this, certain points must be kept in mind.
- The car must be purchased in the name of a company and not in the name of an individual. The company will have to declare their capital gains or losses to avail the benefit.
- The benefit afforded will be limited to the interest payable on the loan and the depreciating value of the car alone.
Self-Employed Individual: A self-employed individual gets tax benefits on the interest payable on a Car Loan. Self-employed professionals, too, have to declare profit or gains from their work or business.
Car Loan Providers in India
(The Iron Bank)
When you think of a Car Loan, banks are the first lenders that come to mind. The good news is that they are not the only institutions that offer Car Loans. A Car Loan can be availed from the other organisations as well. Let’s take a look at the list:
- Banks: Banks are the most frequently approached to avail a Car Loan. Almost all banks offer Car Loans at varying rates of interest. Though the basic process of availing a Car Loan remains the same, there might be differences in the loan amount sanctioned, tenure, interest rates and some other benefits and clauses. Some banks may even roll out special offers where they waive certain fees, like the processing fee.
- Non-banking Financial Companies: An NBFC, or a Non-Banking Financial Company, is a financing organisation that deals mostly with extending credit to those in need. While these companies are not banks, they are also not auto manufacturers, which separates them from in-house financing. These institutions provide loans for both new and used cars. Some companies that come under this purview are Reliance Commercial Finance and L&T Finance Limited.
- In-house Financing: Much like an NBFC, many car manufacturers maintain in-house financing services to extend loans to their customers. A key factor that differentiates in-house financing entities from NBFCs is that they offer Car Loans only for their brand. Other than this differentiating factor, they follow similar procedures when assessing and approving loan applications. Examples of in-house financing entities are Toyota Finance, BMW Financial Services and Mercedes’ Daimler Financial Services.
How To Choose The Right Car Loan
(‘Inky, pinky, ponky’ doesn’t quite work)
When it comes to choosing a Car Loan, the first thing you will notice is the sheer number of options available to you. You can choose from products that are offered by banks, NBFCs and in-house finance companies. The real task that you have at hand is actually picking the product that suits your needs and is economical. After all, just as you don’t want dents in your new car, you don’t want dents in your wallet. Here are some pointers that can help you do just that.
- Do Your Research: Do not settle for the first loan that comes your way. It might seem pretty and all-comprehensive, but that’s because you haven’t seen anything else on offer in the market. You must shop around for the best deals possible. Know your limitation and find a loan that addresses that. You may find a loan that offers you a better interest rate or a better loan amount.
- Always Read The Terms And Conditions: There are times when people take a Car Loan believing that all that the salesperson has told them is all they need to know. Later, they are stumped when a particular condition, which works against them, is invoked. This is why you should always read the terms and conditions section thoroughly. It’s tedious and the print is excruciatingly tiny (it isn’t called ‘fine print’ for nothing), but it’s every bit worth the effort. Don’t just sign on the dotted line without knowing the personality of the loan in and out.
- Apply With A Good Credit Score: Since your eligibility for a Car Loan, or any other loan for that matter, is largely dependent on your Credit Score, it is a good idea to check your Credit Score before applying. There are two advantages to doing this.
First, if you have a poor score, you can take time to beef it up. Second, if you have a good score, you know you can bargain for a better deal. A good Credit Score pushes your chances of getting a Car Loan many notches higher. Inversely, applying with a low Credit Score is detrimental to winning loan approval, and even if you secure a loan, it might come with a high interest rate. Keep in mind, if your Car Loan application gets rejected due to a poor Credit Score, it’ll push your score further down. Forewarned is forearmed as the saying goes, after all.
- Pick The Right Tenure: Selecting the right tenure for your Car Loan is a balancing act between the amount you want to borrow and the EMI that you can afford. Pick a tenure which allows you to repay the loan in the quickest time possible without suffocating your personal finances. Don’t make the tenure too long. A car is a depreciating asset and you shouldn’t find yourself paying more than its worth.
- Ask For The Right Loan Amount: When it comes to the question of how much you should borrow, the best amount to request is what you need. Even if a bank offers to approve more than you have asked for, take only what you need. A smaller loan amount, coupled with the ideal tenure, will mean that you will pay as little interest as possible. If you borrow more, you will have to pay more interest.
- 100% Ex-showroom Or 85% Cost Of The Car: When a lender approves your loan, they might offer you two choices for the loan amount. You can either take 100 per cent of the ex-showroom price or 85 per cent of the on-road price of the car. While none is better than the other, you should make a choice keeping the tenure and loan amount in mind. Pick the one which is more economical and yet fastest to repay.
- Fixed vs. Floating Interest Rates: When it comes to interest rates, the choice can’t be easy either. Choosing between the two rates depends on your understanding of how each affects your repayment schedule and your appetite for risk. Fixed interest rates will keep EMIs consistent, while floating interest rates will differ with changing marketing conditions. Sometimes, interest rates offered by NBFC and in-house financing companies are higher than the one offered by banks.
Useful Tip: When scouting for Car Loans, make liberal use of tools like EMI calculators. You will get a clear idea of your EMI amount and will be able to make necessary changes to suit your convenience.
Alternatives To Car Loans
While a Car Loan is the preferred choice to make a purchase, there are alternatives that you can consider. Let’s see what those are:
Car Loan Vs. Cash Purchase: If you have the funds to make a cash purchase, then why not? You can save all those precious bucks which would otherwise go towards interest payment. However, cars don’t come cheap. If you purchase a car using cash, you are straining your liquidity. Picking one among the two is a decision to be determined by your financial standing. If you can afford to make a full cash transaction, then why not? And if you are strapped for funds, a Car Loan is a good choice. You can repay your loan in small affordable amounts.
If you are making a cash transaction, be wary of the Income Tax Department. A big cash transaction might attract their attention. Make sure you have the papers to prove that the money you used to purchase the car is legal. Or as they say, white!
Car Loan Vs. Car Lease: A Car Loan is one you take to purchase a car. On the other hand, when you lease a car, you are not purchasing it. You are taking it on rent. Car lease companies often lease a car for 2-5 year and the rental is a percentage of the on-road price of the car. So, you might as well purchase it than lease it? If you are thinking this, well, let us tell you that when you lease a car, your only liability is to pay for the fuel. All repair and maintenance regimes are taken care of by the leasing company. They will even offer a pick up and a drop when a service is in order.
With this said, you must compare the lease rent with the EMI amount (assuming you purchase the car). For higher-end, expensive cars it might be cheaper to purchase the car rather than lease it. However, for smaller, economical cars, leasing might be a more profitable option.
Leasing also makes you eligible for tax benefits. The amount you pay to lease a car can be claimed as tax benefits – the entire amount. Sadly, there are no tax benefits accorded to an individual for taking a Car Loan.
Car Loan Vs. Personal Loan: Unlike a Car Loan, a Personal Loan can be used for any purpose. You don’t have to declare the reason for taking a Personal Loan to the lender. With that said, if you are looking to buy a new or a used car, taking a Car Loan is a better option. It’s a secured loan and is given at a lower rate of interest. Inversely, a Personal Loan is an unsecured loan, and hence, lenders charge a higher rate of interest on it.
Another option is to club the two loans to purchase your car. You might have your heart set of that svelte sedan (a little over your budget, but nothing that you can’t manage). At the same time, you know that your lender won’t be willing to accommodate your frugal tricks in order to sanction a bigger loan amount for your dream car. In this case, you can top up your Car Loan with a Personal Loan to cover the gap. You can also take a Personal Loan to pimp your ride.
If you are planning a combination of the two loans to fund your ride, keep in mind the costs. You will have to service two loans. Give your budget a good look before you take the leap. The heart wants what it wants, but the banks want regular repayments. Make sure you can do that too. Remember, once you purchase a car, there will be an uptick in your budget due to fuel and car maintenance costs.
Transferring Car Loan: We’ll say it at the outset that transferring Car Loans is not an easy task. Whether you are transferring it to a new lender or to a new person due to a sale of the car, it won’t be an easy job.
What if you want to switch your loan to a new lender offering a better interest rate? Firstly, there aren’t many lenders who would be willing to take on an ongoing Car Loan. And those that are willing to might choose to treat it as Used Car Loan. First, you’ll have to pay a prepayment charge on your existing loan. Second, the new lender might charge you not-so-lucrative an interest rate after deciding to treat your Car Loan as Used Car loan. So do the math before you make the switch!
What if you decide to sell your car during the loan tenure?
Some Car Loans allow you to sell your car during the tenure, while some don’t. This is something you must be careful about before signing on the dotted line. Ask your lender to add a clause that allows you to sell your car during the loan tenure. Beware, adding the clause is not enough. If you choose to sell your car and also the loan with it, then you have to convince the bank of your car buyer’s financial credibility. In some cases, the lenders might expect the new borrower’s financial standing to be better than your’s; it’s just to hedge themselves against any default.
After you have successfully sold your car and your loan to the buyer of your car, you must pay a visit to the RTO and change the registration of your car and transfer it to the new owner’s name. This process might take a couple of weeks and will cost a little something. Yeah, charges are everywhere.
- What is the maximum amount that I can borrow?
- Car Loans don’t have a maximum limit. The amount sanctioned by a lender is determined by your eligibility fulfilment and the price of the car you wish to purchase.
- Is there a loan that will cover 100% of the cost of the car?
- No. The loans will either cover 100% of the ex-showroom prices or 85% to 90% of the cost of the entire car (insurance and registration included).
- What do I do if my loan is rejected?
- The first thing to do is to find out why it was rejected. If it was rejected because the loan amount requested was too big for your budget, then you can reapply for a lower amount. However, if your application was rejected because of your CIBIL Score, you must take measures to improve it before applying again.
- Can I get a Car Loan without a CIBIL score?
- There may be institutions that will give you a Car Loan without looking at your CIBIL Score, but they might do so at a higher rate of interest. This is possible because a Car Loan is a secured loan where the car itself serves as the asset pledged to the lender. In some cases, the bank may ask you to either provide a guarantor for the loan or get someone to co-apply with you.
- Will I get the same loan tenure for used cars as well?
- No. The tenure offered on Used Car Loans can be considerably shorter than a new Car Loan.
- Will I get the 100% ex-showroom loan for used cars?
- No. With a used car, the matter of the ex-showroom price is not applicable.
- Is there a limit on the age of the used car that I can buy?
- Some banks may impose a limit on the age of a used car. They may require the car to be no older than 5 years
- I chose to pay the loan through cheques, now I want to switch to bank transfers. Is that possible?
- Yes. You can change the method of payment. However, such changes will be subject to the payment of a fee.
- Can I close the loan early?
- Yes. You can increase your EMI amount or pay a lump sum and close your loan, but it’ll attract a charge and may be subject to certain conditions. Always check with the bank.
- Can I make a part payment towards the loan?
- Yes, many banks allow you to make part payments towards the loan, but again, these may be subject to certain limitations. It could be the number of such payments that can be made in one year and the period after which such payments will be accepted.
- What do I need to do once the loan is over?
- Once the loan is over, the lender will furnish a No Objection Certificate (NOC) and Form 35. You need to submit these to the RTO so that the hypothecation of the car to the bank can be removed. You may have to pay a fee at the RTO for such a request.