12 Things to Consider Before Taking a Car Loan

1. Your Budget:

The first thing you should do before applying for a car loan or even speaking with a lender is to decide your car budget. Remember, while buying a car is a big expense, it is probably not a one-time expense. There will be big and small expenses in the future, like car maintenance, fuel, car insurance premiums, repairs, and more. Therefore, it does not make sense to go beyond your budget and overstretch yourself financially.

It is advisable to prepare your budget, considering your income, monthly expenses, existing EMIs and credit card dues, children's school fees, etc., and choose a car model within your budget even if you are eligible for a higher loan amount.

2. The Total Cost of the loan:

Car loan interest rates can vary from lender to lender and typically range between 7% p.a. to 10% p.a. It's important to note that the interest rate advertised on the lender's website might not be the same for every applicant. Your actual interest rate will depend on factors such as your credit score, repayment capacity, the car model you're interested in, and any other aspects the lender may consider. To get the best possible deal on a car loan, it's a good idea to compare interest rates online.

When you are taking a car loan, it's important to remember that the rate of interest is not the only cost factor that contributes to the overall cost of your loan. You should also consider other charges and fees that can significantly impact the total cost of your car loan. These charges include processing fees, prepayment charges, foreclosure charges, and late payment charges, among others. It's essential to be aware of all these charges before applying for a car loan to ensure that you have a clear understanding of the overall cost involved.

3. Monthly Repayments:

Evaluating your capability to pay the car loan EMIs on time is recommended before availing of a car loan. You can assess if you can afford to repay the car loan EMIs without any financial stress by analysing your budget and taking into account the total cost of the car loan.

When you are taking a car loan, it is important to keep in mind that you should only opt for an EMI amount that can be easily paid off with your monthly income without putting any undue stress on your budget. A general rule of thumb is to ensure that your car loan EMI does not exceed 10% of your monthly income and the total EMIs do not exceed 30% of your monthly income. To plan your monthly EMI and calculate the amount that you can comfortably pay each month without compromising your financial stability, you can use the Car Loan EMI Calculators available on several financial websites.

4. Down Payment:

When taking a car loan, you typically need to make a down payment ranging from 10% to 15% of the car's on-road price, as banks usually finance 85% to 90% of the total cost. Some leading banks even offer complete financing, covering 100% of the on-road price. As discussed, your monthly income and repayment capacity also play an important role in determining the amount of your car loan.

The Loan-to-Value ratio, or LTV ratio, represents the proportion of the car price financed by a bank or NBFC compared to the down payment required from the borrower. A higher LTV ratio means a lower down payment. For instance, with a 100% LTV ratio, the lender covers the entire amount, while an 85% LTV ratio implies that the lender finances 85%, and the remaining 15% is required to be paid by the borrower in the form of a down payment.

Although many lenders offer high LTV ratios, they often view this as a higher risk, resulting in a higher interest rate. If financially feasible, making a maximum down payment and opting for a lower LTV ratio with a lender offering a lower interest rate is advisable.

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

5. Loan Tenure:

Typically, banks or NBFCs allow borrowers to select a car loan duration ranging from 1 to 7 years. In specific situations, financial institutions may stretch the car loan term to 10 years. Opting for a lengthier period can lead to lower monthly payments, but it results in higher overall interest expenditure, ultimately causing you to pay significantly more than the principal amount.

6. Flexibility in Loan Repayment:

A lot of people attempt to pay off their loans in advance whenever they have extra funds available. Several banks and financial institutions allow prepayment without any fee after a certain period of repayment. It is important to check with your lender about the prepayment charges and the period after which prepayment can be made without any added fees.

In general, prepayment charges for a car loan with a fixed interest rate typically range from 4% to 6%. It's worth noting that, in line with RBI guidelines, lenders cannot charge for prepayment on a car loan with a floating interest rate.

If you plan to prepay your car loan, choose a lender with minimum or no prepayment charges.

7. Your Credit Score:

The interest rate and Loan-to-Value (LTV) ratio provided by lenders are highly influenced by your credit score. A credit score of 750 or higher is considered favourable and can result in a more beneficial interest rate.

Before engaging in any financial transactions, it is advisable to check your credit score to understand your credit profile and identify any inaccuracies in the score. Having a favourable credit score provides the opportunity to negotiate with your lender regarding the interest rate and/or processing fee. Conversely, if your credit score falls below the desired level, you can take corrective measures to improve it, such as ensuring timely repayment of dues and reducing your credit utilisation ratio.

8. Loan Processing Time:

Securing a car loan should involve an easy process with minimal documentation. Some lenders may efficiently process your loan within minutes, while others might take several days for approval. It is worth checking if your primary bank has any pre-approved car loan offers available to you. You can easily do this by logging into your Internet banking account and avail of a car loan online within a few minutes.

9. Lender's Customer Service:

Customer service is an important aspect that many of us tend to overlook while applying for a loan. The car loan process should be quick and easy and require minimal documentation. Moreover, as a borrower, you will need your latest loan information from time to time and may have several queries throughout the car loan tenure. Therefore, before availing of a car loan, it is essential to check whether the lender has a dedicated customer service team and provides online access to your loan account.

10. Car Insurance:

At times, when you choose to secure a car loan, lenders may encourage you to buy car insurance, credit insurance, and additional insurance plans, aiming to generate additional profit. Although a car insurance policy is mandatory and credit insurance is a valuable tool for safeguarding your loan payments, procuring it directly from the car loan lender is not advisable. This is because they source insurance exclusively from affiliated banks and agencies, limiting your ability to secure the most favourable deal on insurance premiums.

Therefore, when opting for a car loan, it is important not to be swayed by the insurance options presented by the lender. Instead, conduct market research, compare various policies, and assess them to identify the optimal deal for your needs.

11. Lender's Terms and Conditions:

Many people tend to rely on the salesperson's words and reviews from friends and relatives when taking a car loan. However, it is possible that the loan, which initially seemed like a great deal, might not prove to be the same after a certain period. This is because the loan terms might not be in line with your financial situation. To avoid such scenarios, it is advisable to read the loan agreement's fine print thoroughly, along with all the terms and conditions. By doing this, you can avoid future disputes with the lender.

12. Car Loan Alternatives:

Sometimes, individuals may not meet the eligibility criteria for car loans set by lenders or find the interest rates unreasonably high for the particular car model they intend to purchase. In such situations, exploring alternatives like Loans Against Securities, Loans Against Fixed Deposits, gold loans, and other secured loan choices can provide a means to secure funds for purchasing a car. If budget constraints are a concern, buying a used car is also an option. However, it is important to note that interest rates for used cars are typically higher.

To conclude:

Securing a car loan is quite easy once you meet the eligibility criteria. When considering a car loan, bear in mind these 12 crucial things. To choose the most suitable car loan for your needs, it is advisable to assess various lenders based on parameters such as interest rates, additional fees, eligibility criteria, loan terms, and more. Opting for a reputable and well-established lender is essential to steer clear of hidden charges and unfavourable terms in your loan agreement. Thoroughly reviewing the terms and conditions is crucial to prevent potential disputes in the future.

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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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