6 Questions to Ask Yourself Before Taking a Car Loan in India

February 10, 2022 Mutual Fund

Purchasing a new car is a joyous experience and with a quick and easy online Car Loan application process, it has become super easy to obtain a car loan almost instantly these days. But, before taking a Car Loan…

Here are 6 questions to ask yourself before taking a Car Loan in India:

1. Am I financially ready for a new loan?

Taking a new loan is a new financial responsibility that can affect your financial health. Therefore, the most crucial question you need to consider is, are you financially ready to repay the new loan comfortably? Do you have surplus; how much is it compared to the (approximate) EMI? Further, if you are already paying EMIs for existing loan/s, will you be able to handle the financial burden of new EMIs?

To ensure you do not borrow more than your capacity to repay, it is advisable to do a budgeting exercise; all it takes is listing down your monthly fixed and variable expenses. These are home loan EMIs or rent; children’s school fees; household expenses, such as utility bills, lifestyle, food, medical, any other expenses; other loan/s EMIs; as well as savings, payments towards investments (SIPs) and premiums.

Now you can calculate the Debt to Income (DTI) ratio. As a rule of thumb, it must be below 40% so that your inflow is more than your outgoings. This way you will avoid getting into a debt trap and not be financially burdened with EMI repayments.

Advisably, if you already have a high DTI ratio, it makes sense to postpone your decision of taking a Car Loan and opt for it only after you’ve cleared out your existing loans. You should also consider any expenses that might arise in the future, such as wedding, relocation, second home loan, securing a contingency fund, child’s higher education, and retirement. You should decide the loan tenure based on your current and potential future financial situation. Lastly, check your credit score and if you are eligible for the loan amount you are applying for.

2. Do I have all the required documents?

Before applying for a loan, ask the lender to provide you with the list of documents they require and make sure you have them ready. Generally, these documents include identity proof, address proof, income proofs (salary slips or latest Income Tax Returns), the latest bank statements. While applying for a car loan, you will need to submit these documents for the car loan to be approved and disbursed. Any delay in submitting the correct documents will delay your loan sanction process. Hence, it is important to provide all the necessary documents in an orderly and transparent manner.

3. Have I done proper research?

Instead of applying to the first lender you see, it is advisable to do proper research by comparing the interest rates, loan processing fees and other charges, product features and benefits, as well as the terms and conditions of your loan agreement. The interest rate plays a significant role in deciding the lender as it determines your total interest outgo. The lower the rate of interest, the lower will be your monthly repayment. However, most borrowers do not pay attention to other fees and charges like processing fees, late payment charges, etc. that can make a considerable difference in the total loan amount. Therefore, you should make a thorough comparison of car loans offered by different lenders to lower your total loan amount as much as possible. This will reduce your financial burden and the comparative analysis will help you select the right lender that offers higher overall value.

4. Can I make the sufficient down payment?

Several banks and NBFCs offer car loans up to 90%-100% of the car’s ex-showroom price. However, making a larger down payment has plenty of advantages. The higher the down payment, the lower will be your interest outgo and monthly repayments. Moreover, the lender might offer you a better rate of interest if you are making a larger down payment. It also protects you against depreciation. Therefore, it is advisable to opt for a car loan only when you are able to make a down payment of at least 20% of the loan amount. This way you will be able to manage your finances well, maintain your DTI ratio, and clear the outstanding dues easily.

5. Do I have sufficient savings?

Before taking a new loan, check your contingency fund and if you have sufficient savings for emergencies and to maintain a new car. The cost of car maintenance can get really high with regular servicing, the cost of repairs, and replacement of parts, particularly if it is a luxury car. Therefore, you need to calculate the cost of car maintenance, prices of diesel/petrol/gas, car insurance premiums, etc. and ensure you have sufficient savings to manage these expenses regularly. You should also consider the sudden expenses that can arise out of an accident. To manage the cost of repairs from accidental damages and/or medical expenses, it is advisable to buy a good comprehensive car insurance policy. Click here to know how you can save on your car insurance premium.

6. Can I make the pre-payment without any penalties?

Over the loan tenure, you might want to repay the loan faster if you have surplus money in hand. Generally, with yearly bonuses, increments, and gifts, borrowers tend to be able to repay the loan amount before the end of the loan tenure. This can help you save a substantial amount of interest. However, most lenders charge you with pre-closure charges or part-payment charges for closing the loan earlier or making a partial payment before the end of the tenure. The banks and NBFCs might not tell you upfront about these charges. Therefore, research thoroughly, check if the lender charges for pre-closure or part-payment and choose the lender wisely.

To Conclude:

So if you have your heart set on the car of your dreams and ready to take on a new car loan, make sure you answer these questions to prepare for the new financial responsibility and choose the right lender. These questions are intended to help you avoid the financial stress a new car loan can bring and manage your existing financial outgoings better. Since car loans are big amount loans with relatively lengthy tenures, a minor difference in the rate of interest or any other charges can considerably impact the total loan amount. Thoughtfully consider… if your income can get affected by the economic uncertainties, then it is advisable to postpone the car loan until you saved a sufficient amount. This step will give you the confidence in repaying your car loan comfortably. Besides that, if a new car is not a viable option, you can consider owning a second-sale car with a used-car loan.

This article first appeared on PersonalFN here