Should You Opt for a Car Loan this Festive Season?

September 16, 2021 Mutual Fund

The festive season has already begun in India with the arrival of Lord Ganesha. The Indian celebrations are usually marked by exchanging sweets and gifts with friends and relatives. It is considered auspicious to buy new clothes, gold, property, etc., on the occasion of any festival. A car is one such expensive thing people wait to purchase during a festive season, because it is the auspicious time of the year and moreover, people get the best deals during this season.

However, due to the COVID-19 pandemic, many people are in a financial crunch, and like most other sectors, the pandemic has brought the most challenging times for the automobile industry as well. Hence, it would be difficult to decide whether you should opt for a car loan on this festive season, considering the uncertainties ahead. To make an informed decision, consider these aspects of opting for a car loan during the festive season and the pandemic:

• Many people are considering buying a car during the pandemic. As keeping a distance is a need of an hour and public transport is not the safest transport option during pandemic. However, one should note that safe transportation is necessary for happy and healthy life. But at the same time, not creating financial stress is equally necessary.

• While finalising the car brand and a model, you should do a proper research and choose the car within your budget. Many people think that a car is a onetime purchase. Therefore, they extend their budget to buy their dream car, which can hurt their pocket later.

• Currently, the rate of interest on car loans is between 7.25% p.a. to 9% p.a. The most crucial things one needs to consider before availing of a car loan are the rate of interest and loan tenure. Car dealers generally show you a lower EMI to make it seem affordable by simply extending the loan tenure, ultimately increasing your total interest outgo.

• If you opt for a regular car loan, the average rate of interest is 8% p.a. Please note that the rate of interest varies from lender to lender and depends upon the car model you choose. Suppose you avail of a car loan of Rs 8,00,000 for a loan tenure of five years. Considering the interest rate of 8% p.a. you end up paying interest of Rs 1,79,020. Therefore, it is advisable not to avail of a car loan if it is not an absolute requirement or the chances of external factors impacting your income are high.

• Many banks and Non-Banking Financial Companies (NBFCs) have a tie up with various automobile companies and dealers. They are jointly offering various car loan schemes along with discounts and exchange offers to attract consumers. Here are some of the popular schemes on car loans:

  1. Step-up EMI option:

     If you opt for a step-up EMI instead of a regular car loan, you pay a lower EMI for the first year of the loan. The EMI increases from the second year onwards. The step-up EMI is a better choice for the people whose income has been negatively impacted due to the current pandemic.

  2. Buy Now Pay Later Option:

     Buy Now Pay Later scheme can release your financial burden for a short time period. In this scheme, typically, three months time is offered as an EMI free period. So, if you buy a car with Buy Now Pay Later scheme, you do not have to pay anything for the first three months. However, the interest keeps accumulating until the fourth month when you will start paying your EMIs.

  3. Balloon EMI option:

     The Balloon scheme enables you to pay lower EMIs for most of your loan period. For example, if a loan duration is five years then a borrower has to pay a lower EMI for 59 months, and the remaining amount is included in the last EMI of the loan repayment. Generally, the last EMI amounts to 25% of the total loan, making other EMIs considerably lower.

     Although all these schemes seem financially beneficial, they are based on the assumption that your ability to repay will increase in the future, which is not guaranteed considering the current uncertainties. Moreover, before opting for any of these schemes, a borrower should remember that the interest charged on such schemes is always higher than the regular loan, and you end up paying a hefty amount of interest.

• Another popular and cost-effective alternative to owning a car is opting for cab-availing services. The leading cab-availing services like Ola and Uber have reached most cities and towns across the country. For short distances, opting for cab services can be more affordable.

  Let's see the benefits of availing cab services over owning a car through a car loan:

  1. There is no burden of down payment and EMIs with cab services.

  2. With a steep rise in petrol and diesel prices, the fuel cost can be an additional financial burden if you own a car.

  3. Opting for cab-availing services can save your yearly costs of car maintenance and car insurance.

  4. In case of an accident, the repair and replacement cost can be an out-of-pocket expense if the insurance claim gets rejected.

  5. With 5 to 7 years of loan tenure, you pay approximately 20% to 30% extra amount than the actual cost of your car. And, by the time you pay off your EMIs and close your loan, the market value of the car substantially decreases due to the car depreciation.

  However, if you frequently have to travel a medium or long distance, opting for cab services might not be the best solution for you. Also, if you prefer comfort over cost, there is no better alternative to owning a car. With cab services, there can sometimes be issues like non-availability of the cab, ride cancellation by the driver, surges in peak hours, etc.

• If you are amongst those to whom opting for cab-availing services is not suitable, and a car loan can create financial stress on you, you can consider buying a used car. The prices of good quality used cars are substantially lower than the new cars. Almost all the banks and NBFCs offer used car loans. Although the interest rate of used car loan is comparatively higher than the rate of new car loan, it is still affordable because the principal loan amount is usually meagre.

To Conclude:

Deciding whether or not to opt for a car loan this festive season can be challenging, especially considering the uncertainties surrounding us. If availing of a loan is going to be financially stressful for you or if your income gets affected by the uncertainties, then it is advisable to postpone the car loan until you save a sufficient amount that gives you confidence with your loan repayment. Otherwise, you should consider availing of a used car loan, which is an affordable option. However, if you do not travel frequently or need to travel regularly a short distance, then opting for cab-availing services is a better and economical choice.

This article first appeared on PersonalFN here