10 Things to Keep in Mind When Taking a Car Loan

May 23, 2022 Mutual Fund

Owning a car was once considered a luxury, but considering the current pandemic, it has now become a necessity for many people. With many offices opening their doors for work from the office, more and more individuals are considering buying a car to ensure the safety of their health.

Although we all would like to drive a car, some of us cannot afford to buy it without any financial help. In fact, many people prefer to opt for a car loan since it is available at an affordable rate of interest. If you, too, are considering taking a car loan, read these 10 important things to keep in mind before taking a car loan.

1. Rate of Interest:

The rate of interest on a car loan may vary from lender to lender, from 7% p.a. to 9% p.a. The interest rate given on the website of the bank or financial institution does not necessarily guarantee the same rate to every applicant. Your car loan interest rate will depend upon your loan repayment history, credit score, repayment capacity, the car model, and any other aspects your lender may consider.

To ensure you get the best deal, compare the rates online, check with your primary bank if you have any pre-approved or special offers (you will be able to see such offers by logging into your internet banking account), and then finalise the lender.

2. Other Fees and Charges:

Apart from the interest rate, the lender charges several other fees and charges you should know in advance. The processing fee, prepayment charges, foreclosure charges, late payment charges, etc., are such important charges that can impact the overall cost of your car loan.

3. Down Payment:

You only have to pay a 10%-15% down payment when you buy a car on a car loan because banks finance 85%-90% of the on-road price. Some of the leading banks provide up to 100% financing of the on-road price. Your monthly income and repayment capacity also plays an important role in determining the amount of your car loan.

The Loan To Value ratio, also known as the LTV ratio, is a proportion of the price of the car financed by a bank or NBFC and the down payment required to be done by the borrower. A high LTV ratio means you have to pay the minimum down payment. For e.g., if the LTV ratio to a car loan is 100%, you get 100% of the amount financed by the lender, and if the LTV ratio of the car loan is 85%, only 85% of the price of the car is financed by the lender and the rest 15% is the down payment that you need to pay from your pocket.

Though many lenders provide high LTV, most of them consider it a high risk; hence, they charge a higher rate of interest. If you can afford a down payment, it is advised to go with a little lower LTV ratio if the lender is offering a lower rate of interest.

4. Your Credit Score:

Your credit score plays an important role in deciding your interest rate and Loan To Value (LTV) ratio. A credit score of 750 or above is considered good. Therefore, lenders can offer a comparatively better rate of interest.

It is a good idea first to check your credit score so that you get an idea of your credit profile and can report any discrepancies in your score. Having a good credit score can give you the advantage of negotiating with your lender on the interest rate or processing fee. However, if your credit score is not up to the mark, you can take corrective actions to improve it, such as repaying your dues on time and lowering your credit utilisation ratio.

5. Loan Tenure:

Generally, the bank lets you choose your car loan tenure from 1 year to 7 years. In certain cases, the banks or financial institutions may extend the car loan tenure up to 10 years. Choosing the longer period may decrease your monthly repayment, but you ultimately end up paying a lot more than the principal amount.

6. Repayment Options:

Many of us try to prepay the loan whenever we have surplus funds. Many banks and financial institutions allow prepayment without any charge after a certain repayment period. You should always check with your lender what the prepayment charges are and the period after which the prepayment is permitted with no additional charges.

Generally, the prepayment charges can vary from 4% to 6% on a car loan with a fixed interest rate. As per the RBI guidelines, no lender can charge for prepayment on a car loan with a floating rate of interest.

If you already have plans of prepaying your car loan, you should go for minimum or nil prepayment charges.

7. Financier tie-ups:

Car dealers generally have tie-ups with various banks and NBFCs for quick and easy lending to car buyers. If you have finalised your car dealer, it would help if you check with the lender associated with them. The associated lenders can sometimes offer better deals on the interest rate and processing fee compared to other lenders, along with faster processing of a loan.

8. Customer Service:

Customer service is a crucial aspect that many of us ignore when availing of a loan. The car loan process should be quick, easy, and require minimum documentation. Besides, as a borrower, you will need your latest loan information from time to time and will have several doubts throughout the car loan tenure. Therefore, before availing of a car loan, you should check whether the lender has a dedicated customer service team and online access to your loan account.

9. Terms and Conditions:

Many people rely on the salesperson’s words and reviews from their friends and relatives when taking a car loan. However, sometimes the loan that looked a great deal initially might not prove to be the same after a certain period. You might find the loan terms are not in line with your situation. To avoid such scenarios, it is advisable to thoroughly read the fine print of the loan agreement, along with all the terms and conditions. This will help you avoid any disputes with the lender in the future.

10. Alternative to Loan:

If you do not have a good credit score to be eligible for a car loan or have a high credit utilisation ratio, it makes sense to avoid availing of new loans. It is advisable to work on improving your credit score by repaying your current dues and reducing the credit utilisation ratio. However, if buying a car is necessary due to any reason, you should consider other options rather than taking a car loan. You can consider opting for a loan against securities or any other secured loan that can be availed with an average credit score.

To Conclude:

It is easy to avail of a car loan once you fulfil the eligibility criteria. Keep these 10 important things in mind if you are considering taking a car loan. By comparing different lenders on various parameters like interest rate, other fees and charges, eligibility requirements, loan terms, etc., you can choose the right car loan that matches your requirements the best. To avoid getting trapped in a loan with hidden charges and terms, you should always choose a reliable and reputed lender. M ake sure you carefully read the terms and conditions to avoid any disputes in the future.

This article first appeared on PersonalFN here