Opting for a car loan? Here are some mistakes that you should avoid
According to a recent report by a well-known research institute in the country, the car loan business in the banking sector has increased to 20% in FY2017. This growth can be attributed to the increase in volume of car sales, consumers’ preference for financed cars, and the hike in car prices. Several top automakers in the country have announced a price hike across various car models in FY2017-18.
This month, India’s largest carmakers have hiked their car prices by Rs17,000 to Rs25,000. With the increase in car prices, consumers look to banks for auto finance. Banks and Non-Banking Financial Companies (NBFCs) have been offering easy access to credit to consumers by providing low-interest rate car loans for the purchase of new and used cars. Furthermore, India is the 5th largest passenger vehicles market in the world. Therefore, it’s not surprising that as of March 2017, the car loan business of the country’s eight leading banks is at Rs2.08 trillion.
Owning a car of your choice has become easier now with banks offering new and used car loans at competitive interest rates and flexible loan tenures. However, as with any secured and unsecured loans like home loans and personal loans, there are several factors to consider before applying for a car loan. Understanding how a car loan works can help you choose a suitable car loan offer. Here is a list of car loan mistakes you should avoid:
● Check your car loan eligibility before applying for a car loan so as to avoid rejection. Multiple loan rejections can have a negative impact on your credit score. One of the requirements to get instant loan approval is to have a good credit score. A credit score of 750 or above indicates your creditworthiness. Banks offer car loans to any individual aged 21 to 65 years with a good credit score, a steady income, and a stable occupation.
● Don’t pick a car loan tenure without using the EMI calculator. It is important to choose a suitable loan tenure so as to keep the overall interest payments to a minimum. A short loan tenure means higher Equated Monthly Installments (EMIs), but you can pay off the debt in a short period of time. A long loan tenure means smaller EMI payments but your overall interest payments will be higher. Therefore, use an online car loan EMI calculator to pick a suitable car loan tenure. Usually, a car loan tenure ranges from 1 to 7 years, depending on the type of car loan you choose — new car loan, used car loan, or loan against car.
● Car loan interest rate, processing fee, prepayment fee, and other charges vary from lender to lender. Which is why, it is advisable to compare various car loan offers across the top lenders (banks and NBFCs) and choose one with a low interest rate, zero processing fee, suitable loan tenure, and flexible repayment options. There are several car loan offers available in the banking sector, so it can be difficult to pick the right one. When you don’t do sufficient research, you may end up missing out on some good deals. Therefore, if you are in the market for a car loan, visit a reliable third-party website to compare the features and benefits of various loan offers to refine your search.
● Stick to the budget you have in mind for a car of your choice. Salespersons in car showrooms are individuals who are trained to break your will when it comes to choosing a car that is within your price range. You will no doubt be showed more expensive cars with advanced features. However, stick to your first choice of car and the budget you have in mind. Or else, you may end up with a huge car loan that you can’t afford to repay. Defaulting on a car loan will definitely have a negative impact on your credit score and credit history. When you apply for future loans, defaulting on your car loan will throw up a red flag and the lenders may hesitate to approve your loan application.
● Maintain a low debt-to-income ratio with regards to the loan repayment schedule so as to avoid defaulting on your car loan. Ensure your car loan EMIs don’t exceed more than 50% of your income. If you were to default on your car loan, the bank will repossess the car and put it up for auction to make up for the outstanding dues.
● Make a significant down payment in order to keep the cost of your car loan to a minimum. Higher down payment means lower the cost of your car loan and vice versa. If you have sufficient funds to make a significant down payment on a car of your choice, then go ahead and do so, because the rest of the cost can be paid for by the bank.
● Don’t pre-close your car loan as it will affect your credit history. Making timely car loan EMI payments will help improve your credit score. If you were to prematurely close your car loan, not only will you have to pay a penalty fee, but also end up with a poor credit score. You can instead make part payments called prepayment but it comes with a prepayment penalty fee. Car loan prepayment is allowed after 12 EMI payments.
One of the benefits of opting for auto finance is that banks offer a car loan of up to 85-100% of the on-road or ex-showroom price of the car. The on-road price of a car includes the ex-showroom price, state government tax, and four-wheeler insurance cost. Another benefit is that you don’t have to break your long-term savings scheme like a fixed deposit to purchase your dream car.