Here's what you need to know before applying for a car loan
Lenders offer car loans with easy equated monthly instalments, which make it easier to afford a car without disturbing one's budget.
Earlier, buying a car was a milestone in one's life as one had to shell out a huge amount of money, but now one can simply take a car loan.
Banks and NBFCs (Non-Banking Financial Companies) offer car loans with easy equated monthly instalments (EMIs), which make it easier to afford a car without disturbing one's budget.
Car loan offerings
Lenders offer loans on both new as well as pre-owned cars. However, the interest rates are different for new and pre-owned cars. For the former, the rate is in the 9.25-13.75% range, whereas for the latter, it is between 12.50 and 17.50%.
While applying for a loan, there are some eligibility conditions which one must fulfil, including age, minimum salary requirements, employment type and residence area.
i) Identity proof such as Permanent Account Number (PAN) Card, passport, driving license, etc.
ii) Address proof such as Voter ID Card, passport, etc.
iii) Age proof
v) Car documents
vi) Income proof such as 3 months' salary slips, 6 months' salary bank account statement, latest income-tax return, etc.
Some lenders also ask for a car insurance copy and driving license before accepting the loan application.
When you buy via a loan, your car is hypothecated to the lender. Hypothecation gives the right to the lender to seize your asset, i.e., your car, for instance, if you do not pay the EMI on time.
The hypothecation letter is part of the car registration papers. Once you have paid all your EMIs, you must make sure to change the owner's name in the papers.
Hypothecation can be removed by visiting the Regional Transport Office (RTO) along with documents such as No Objection Certificate (NOC), car insurance papers and address proof.
Before visiting the RTO, one must first remember to submit the NOC received from the lender to the insurance company, which will revise the insurance papers reflecting the new owner.
The loan amount you can avail depends on your age and income. The amount disbursed varies from one lender to another depending on your net monthly salary or annual income. Presently, the range is 25-48 times of 'net monthly income' or 4-6 times of 'yearly income'.
Lenders offer 80-90% of the financing. Some banks even offer up to 100% financing. The amount can be of the 'Ex-showroom' price or the 'On-Road Vehicle' price.
Ex-showroom price is paid to buy a car from a dealer. When you pay other charges such as registration charges, insurance premium, road tax, etc., to get the car on the road, then it becomes the On-road price, which is the actual cost of the car that one pays to get the car keys in their hand.
While taking a loan for a pre-owned car, there are many costs like re-registration charges which are not covered.
Interest rate charged
The lenders charge an interest rate on car loans as Marginal Cost of Funds based Lending Rate (MCLR) plus an additional spread. The rate charged is generally fixed. This makes repayment easier without having to worry about the increase in the EMIs in future.
However, if you think the interest rates will be coming down in future then you can opt for the floating interest rate. Presently (in 2017), the interest rate is in the 10.30-15.25% range.
Some lenders even offer discounts to women on the interest rate charged.
Taking a loan for a pre-owned car can be expensive as compared to one on a new car as the interest rate charged by most banks is higher on the former.
A lender levies many charges while accepting the loan application or on the early loan closure.
Processing fees are charged when the application is processed. It varies from one bank to another and is in the 0.4-1% range of the loan amount.
The lenders also charge some fees on early loan closure, known as 'foreclosure charges', it is charged on the outstanding loan amount. This charge varies from one bank to another, presently ranging between 5 and 6%. Some banks also offer 'no foreclosure charges'.
Some lenders also offer what is called 'part payment'. It means you can pay a part of the principal outstanding to reduce your liability. A bank charges 3-6% depending on the tenure left to accept the part payment facility. However, this may not be allowed in the initial tenure of the loan, say within 6 months.
Lenders offer a flexible repayment period generally stretching between 1 and 7 years. One can choose the repayment period as one's convenience.
A borrower can prepay the loan. However, there are some charges involved in such a case.
Most banks finance all small and medium-sized cars, sport utility vehicles (SUVs) and multi-utility vehicles (MUVs). It is, however, a wise move to check the list of cars that can be financed by the lender for the maximum amount offered with fewer charges involved.
Also, the car bought in an individual's name can't claim any depreciation as per the Income-tax Laws. There are no tax benefits on taking a car loan.
The interest paid on the loan is the actual amount one spends to buy a car. Therefore, one must be careful of the cost while taking a loan.
Applying for a car loan is easier as it requires less documentation as compared to a home loan. Also, there is no additional collateral asked for as against in the case of the former. The loan itself is secured against the car. However, while buying a car, do not stretch your budget.
Click here to calculate your car loan.
(With inputs from Sunil Dhawan)