10 Things Every Car Loan Applicant Should Remember for a Smooth Ride Ahead

This guide unravels the 10 things every car loan applicant should remember, empowering you to make informed decisions and ensuring a smooth ride ahead.

1. Check Your Credit Score:

Your credit score plays a significant role in determining both your interest rate and loan-to-value (LTV) ratio. A credit score of 750 or higher is considered favourable, enabling lenders to extend more competitive interest rates. It is prudent to initially review your credit score to understand your credit standing and rectify any discrepancies.

Having a strong credit score empowers you to negotiate favourable terms with your lender, including interest rates or processing fees. Conversely, if your credit score falls short, proactive measures can be taken to enhance it, such as timely repayment of debts and reducing your credit utilisation ratio.

2. Compare and Choose the Best Interest Rate:

The interest rate applicable to a car loan can fluctuate among different lenders, typically ranging from 7% p.a. to 10% p.a. The interest rate advertised on a bank or financial institution's website does not guarantee the same rate for all applicants.

Your specific car loan interest rate depends on various factors, including your repayment history, credit score, ability to repay, the chosen car model, and any additional considerations your lender may evaluate.

To secure the most favourable deal, it is advisable to compare interest rates online, inquire with your primary bank for any pre-approved or exclusive offers (accessible by logging into your Internet banking account), and then make an informed decision on the lender to proceed with.

Use a Car Loan EMI Calculator to calculate your EMI and total interest outgo.

3. Pay Attention to Other Fees and Charges:

Besides the interest rate, there are various supplementary fees and charges imposed by the lender that should be understood in advance. Processing fees, prepayment penalties, foreclosure charges, and late payment fees are among the crucial charges that can impact the overall expense of your car loan.

4. Decide the Loan Duration:

Typically, banks offer a range of car loan tenures spanning from 1 year to 7 years, although, in certain scenarios, they may extend this period to 10 years. Opting for a longer tenure may result in lower monthly payments but will ultimately lead to paying significantly more than the principal amount.

5. Calculate the Down Payment:

When purchasing a car through a car loan, you typically only need to provide a down payment ranging from 10% to 15%, as banks usually finance 85% to 90% of the on-road price. Some leading banks offer financing of up to 100% of the on-road price. Your monthly income and repayment capacity are also influential factors in determining the loan amount.

The loan-to-value (LTV) ratio is a critical consideration, representing the percentage of the car price financed by a bank or NBFC compared to the down payment made by the borrower. A higher LTV ratio implies a lower down payment requirement.

For instance, if the LTV ratio for a car loan is 100%, the lender finances the entire car amount, while an LTV ratio of 85% means the lender covers 85% of the car price, requiring the borrower to contribute the remaining 15% as a down payment.

Although many lenders offer high LTV ratios, they often perceive it as a higher risk and may consequently apply a higher interest rate. If possible, opting for a slightly lower LTV ratio, especially if accompanied by a lower interest rate offer, can be advisable if you can afford the down payment.

[Also Read: Here's How to Make a SMART Financial Plan to Buy a Car Instead of Taking a Car Loan]

6. Understand Different Repayment Options:

Many borrowers aim to settle their loans ahead of schedule when they have surplus funds available. Most banks and financial institutions allow car loan prepayment without any penalty after a specified repayment period. It is advisable to inquire with your lender regarding prepayment charges and the duration after which prepayment is allowed without incurring additional fees.

Typically, prepayment charges range from 4% to 6% on car loans with fixed interest rates. As per RBI regulations, lenders cannot impose prepayment charges on car loans with floating interest rates. Opting for minimal or zero prepayment charges is prudent if you expect to prepay your car loan.

7. Check for Financing Tie-ups:

Car dealers often collaborate with various banks and NBFCs to facilitate swift and convenient lending for car buyers. If you have selected your car dealer, it is beneficial to explore the lenders associated with them. These affiliated lenders may offer more favourable terms on interest rates and processing fees, along with quick loan processing.

8. Know About Customer Support:

Despite its importance, customer service is sometimes overlooked when getting a loan. A seamless car loan process, minimal documentation requirements, and easy access to the latest loan information are essential aspects. Therefore, before committing to a car loan, assess whether the lender provides dedicated customer support and online access to your loan account.

9. Read and Understand the Agreement Terms & Conditions:

Many individuals rely on salespersons' assurances or acquaintances' feedback when securing a car loan. However, what initially appears to be an attractive loan deal may not necessarily remain favourable.

Unanticipated discrepancies in the loan terms may emerge that do not align with your circumstances. To avoid such situations, it is prudent to meticulously review the fine print of the loan agreement, thoroughly examining all terms and conditions. This diligent approach can forestall potential disagreements with the lender down the line.

[Also Read: 6 Questions to Ask Yourself Before Taking a Car Loan in India]

10. Explore Car Loan Alternatives:

If your credit score is insufficient for eligibility or your credit utilisation ratio is high, it may be wise to avoid getting new loans. Concentrating on enhancing your credit score by promptly settling existing debts and reducing credit utilisation could be beneficial.

Nonetheless, if purchasing a car is necessary, explore alternatives to conventional car loans. Options like loans against securities or other secured loans may be available with average credit scores.

Conclusion:

Securing a car loan is quite easy once you meet the eligibility criteria. Keep these ten critical factors in mind when opting for a car loan. By meticulously comparing different lenders based on factors such as interest rates, additional fees, eligibility criteria, and loan terms, you can select the most suitable car loan to meet your needs.

To sidestep potential pitfalls like hidden charges and unfavourable terms, opting for a reputable lender is advisable. Ensure thorough scrutiny of the terms and conditions to avoid future disputes.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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