How to Choose The Right Car Loan This Festive Season?

Owning a car was once considered a luxury, but it has now become a necessity for many people. The list of benefits of owning a car only grows when we consider the current pandemic. With offices and public places slowly opening their doors, more and more people are considering buying a car to safeguard themselves from COVID-19.

Although we all would like to drive a car, some of us cannot afford to buy it with a full down payment. In fact, many people prefer to buy a car on loan since it is available at an affordable rate of interest.

But, before directly jumping to the topic, let's first clear the basics! To get a better idea of a car loan, let's look at the features and benefits of it:

1. Various types of car loans:

   Most of us are familiar with the new car loan which we avail of when we buy a new car. Do you know that we can get a car loan even for a used car? A used car loan is offered by almost all the 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 on a car loan because banks finance 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 also plays an important role in determining the amount of your car loan.

3. Flexible Loan Tenure:

   Generally, the bank let you choose your car loan tenure from 1 year to 7 years. In certain cases, the banks or financial institutions may extend the car 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 for availing of a loan. If your bank has a tie-up with your car dealer, the disbursed amount will directly be transferred to the dealer's account.

Car Loan Eligibility:

This is a 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.

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 of a car loan. But in a normal scenario, you will need to submit the below-mentioned documents:

1. Identity Proof:

   You may submit any of these documents as identity proof:

   1. PAN Card
   2. AADHAR Card
   3. Driving Licence
   4. Voter ID
   5. Passport

2. Address Proof:

   All of these documents are considered valid address proof.

   1. Passport
   2. AADHAR Card
   3. Driving Licence
   4. Voter ID
   5. Ration Card with applicant's name
   6. Electricity or Telephone Bill with applicant's name

   Many banks usually prefer PAN Card as identity proof and AADHAR Card as address proof.

3. Last 6 months bank statement

4. Income Proof:

   For salaried applicants:

   1. Last 3 to 6 months salary slips
   2. Latest Form 16

   For self-employed applicants:

   1. Last 2 years ITR
   2. Audited Balance Sheet
   3. Profit and Loss Statement

5. Business Proof (only for self-employed applicants):

   Any 2 documents in the name of your business entity are required.

   1. Registration Certification
   2. Latest utility bills
   3. Any other government-approved document with the name and address of the business entity

Now that we have learned all the necessary aspects of the car loan, let us understand how you can choose the right car loan for you. At this point, you might have already decided on the car you would like to purchase. We advise you to choose a car model within your budget so that you do not put yourself into the unnecessary financial stress of hefty EMIs. Apart from the on-road price of the car, you should also pay attention to the annual maintenance expenses of the car, the fuel it requires, and the car insurance premium you need to pay every year. Making a purchase during the festive season is a good decision because you will find many offers and discounts by banks and financial institutions on the rate of interest, processing fee, etc. Some banks also offer special discounts if you buy a car from the dealers they have tie-up with. Read on to know how you can choose the right car loan for you this festive season considering the below points:

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 go for minimum or nil prepayment charges.

1. Compare the rate of interest:

   The rate of interest for a car loan may vary from lender to lender from 7.10% to 9%. The rate of interest given on the website of the bank or financial institution does not necessarily guarantee the same rate to every applicant. The rate of interest mentioned on the website is the minimum rate that a bank can offer. Your car loan interest rate will depend upon your loan repayment history, credit score, repayment capacity, the car model, and any other aspects your lender may consider.

   To get the best of festive season offers, compare the rates online, check with your primary bank if you have any pre-approved or special offers (you will be able to see such offers by logging in to your Net Banking.

2. Compare the Loan-To-Value ratios:

   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 down payment required to be done by the borrower. 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 rest 15% is the down payment that you need to pay from your own pocket.

   Though many lenders provide high LTV, most of them consider it a high risk; hence, they charge a higher rate of interest. If you can afford a down payment, it is advised to go with a little lower LTV ratio if the lender is offering a lower rate of interest.

3. EMI affordability:

   The EMIs are the monthly instalments that you pay towards your loan. The main aspects that go into calculating your EMIs are the loan amount, rate of interest, and loan tenure. You should consider your existing loan EMIs, insurance premiums, and other fixed monthly expenses when you finalise your car loan EMI affordability. As per almost all the finance experts, your car loan EMI should not be more than 20% of your monthly income. Also, the total EMIs should not be more than 50% of your monthly income.

4. 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 and the repayment period after which the prepayment is permitted with no additional charges.

5. 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.

6. 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 advantage to negotiate with your lender on the rate of interest or processing fee.

Final words:

In this article, we have covered everything you need to know to choose the right car loan. Take advantage of the offers and discounts that various banks and financial institutions offer during the festive season. Please note that the features, criteria, rates and charges mentioned above are general, and may vary from lender to lender. Once you finalise your lender after comparing them with various parameters mentioned above, reconfirm the car loan features, eligibility criteria, rates and charges, with your lender before applying. Also, read all the terms and conditions thoroughly to avoid any future disputes.

Warm Regards,
Ketki Jadhav
Content Writer

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