Here’s a Quick Guide if You Are Planning to Buy a New Car this Diwali

October 28, 2021 Mutual Fund

After nearly two years of restrained economic activity and deceleration of demand amid the COVID-19 pandemic, consumers are now geared up to splurge this Diwali. This is expected to result in a high demand for certain products and services, especially cars. The car manufacturers and dealers usually give huge offers and discounts during Diwali to lure potential customers; hence, this makes it an ideal time to fulfil your dream of owning a new car.

Buying a car has become a lot easier with most banks and Non-Banking Financial Companies (NBFCs) offering a variety of car loans at affordable Equated Monthly Instalments (EMIs). So if your heart has been set on a specific car for a long time or you need a car urgently, this festive season could be the best time to purchase one. The most exciting offers of this year’s sale include free car insurance for one year, free accessories, cash discounts, loyalty exchange bonuses, etc.

If you are planning to buy a new car on loan this Diwali, here’s a quick guide…

Let’s understand the financial implications of buying a car during Diwali:

• Manufacturers and dealers offer higher discounts and exciting offers on high-value cars, which can tempt you to exceed your budget. However, it can create a financial burden later if you are unable to pay the EMIs on time in the future. Therefore, it is necessary to plan your budget in advance and stick to it.

• Apart from the actual cost of the car, your related expenses will also increase. With fuel prices escalating, higher car maintenance costs, buying quality car accessories, purchasing car insurance, etc. on the regular can become quite unaffordable for some car owners.

• Most car brands offer huge end of the year discounts in December to clear the stock of the current year.

• A car bought in the last few months of the year gets a stamp of the previous year's model within a few months.

• Purchases such as cars are depreciating assets that will not hold the same value (you paid for) over the long term, so choose your car loan prudently.

Here are some of the benefits of buying a car on a car loan:

1. Various types of car loans:

Most of us are familiar with the new car loan that we can avail of when buying a new car. Do you know that we can get an auto loan even for a used car? A used car loan is offered by almost all banks and financial institutions at a slightly higher rate of interest and lower loan-to-value (LTV) ratio than a new car loan.

2. Maximum Financing:

You only have to pay a 10%-15% down payment when you buy a car with an auto loan because the bank finances 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 plays an important role in determining the amount of your car loan.

3. Flexible Loan Tenure:

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

4. Instant Disbursement:

Nowadays many leading banks provide pre-approved car loans to their special customers. Having a pre-approved loan means you need to submit the minimum or no documentation to avail of the car loan offer. If your bank has a tie-up with the car dealer you wish to purchase your car from, the disbursed amount will directly be transferred to the dealer’s account.

Here are the best offers on car loans this Diwali:

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. This could imply that the loan tenure will be shorter. The step-up EMI is a better choice for individuals whose income has been negatively impacted due to pay cuts or lower income during the current pandemic.

2. Buy Now Pay Later Option:

Buy Now Pay Later scheme can alleviate your financial burden for a short period. In this scheme, typically, three months 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 the loan duration is five years, then a borrower will 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 these car loan schemes seem financially beneficial, they are based on the assumption that your repayment capacity will increase in the future, though it is not guaranteed considering the current state of uncertainty. 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.

Consider these points before availing of a car loan:

1. Loan offerings:

Different lenders offer different car loan features. Therefore, it is essential to compare the loans of various banks and NBFCs and choose the best-suited car loan for your budget and requirements. For example, if you are planning to buy a used car, look for lenders that are offering attractive used car loans.

2. Interest rate:

The rate of interest for a new car loan currently ranges between 7% to 12% p.a., depending on the lender and car model. It is advisable to do thorough research to find the best interest rate as even a small difference in the rate of interest can make a considerable difference in EMIs you will end up paying over time. As the finance experts say, your car loan EMI should not be more than 20% of your monthly income.

3. Prepayment Charges:

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, if any, and the repayment period after which the prepayment is permitted with no additional charges.

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

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

4. Processing Fee:

The processing fee is the amount that is charged by the banks or financial institutions to process your loan application. The processing fee can be anywhere from 1% to 2.5% for a car loan. You will get various discounts on processing fees during the festive season.

5. Loan amount:

Your income and age play an important role when calculating the auto loan amount you are eligible for. Applying for a higher amount than what you are eligible for will lead to your loan application being rejected. Ensure the car loan amount you are applying for is easy for you to repay and does not result in a debt burden that becomes difficult to repay.

6. Loan-To-Value ratio:

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 financial institution 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 remainder 15% is the down payment that you have to pay from your own pocket.

7. Loan tenure:

The loan tenure is the time frame within which you repay your auto loan. 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 auto loan tenure up to 10 years. The bank or NBFC representative could demonstrate the calculation of a car loan with a smaller EMI by increasing the loan tenure. Note that the longer loan tenure can make your EMIs seem smaller, making the overall loan look affordable, however, the longer the loan tenure, the higher the interest you eventually pay.

8. Hypothecation:

A car loan is a secured loan because it is backed up by the car you purchase with the loan. Therefore, your car is hypothecated to the lender until the last EMI is paid. So, in case you default on the car loan repayment, the lender holds the right to seize/repossess your car to recover the unpaid dues. Once you have repaid the entire loan, you are required to remove the hypothecation by submitting the required documents to the Regional Transport Office (RTO).

9. Credit score:

Your credit score plays an important role in deciding your rate of interest and 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 to first 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 leverage/advantage to negotiate with your lender on the rate of interest and/or processing fee.

10. Car Loan Eligibility:

In the table below is the general eligibility criterion that most banks and financial institutions follow. We advise you to check the eligibility criteria of the lender you have shortlisted as the car loan eligibility criteria may vary from lender to lender.

11. Documentation:

As we already discussed, if you have a pre-approved offer of a car loan from your bank, you need to submit a minimum to no documents to the bank to avail it. But in a normal scenario, you will need to submit all the required documents to the lender such as, identity proof, address proof, income proof, bank statement, business proof (for self-employed individuals), etc.

In conclusion:

You can take advantage of the offers and discounts that various banks and financial institutions offer during Diwali after considering the above mentioned points. Please note that the features, criteria, rates and charges mentioned above are general and may vary from lender to lender. Hence, it is advisable to reconfirm these aspects with the lender before applying for a loan. Most importantly, please read all the terms and conditions thoroughly to safeguard your financial interest and avoid any disputes in the future.

This article first appeared on PersonalFN here