Things to remember before you apply for a car loan

Written by Adhil Shetty | Updated: Oct 4 2013, 23:30pm hrs
LoanEvery bank has its own distinct criteria for providing a loan. (Reuters)
In the backdrop of an economic slowdown, banks have become cautious about disbursing car loans as they fear that borrowers may default. Those planning to buy a car right now may get disappointed as the interest rates are set to be revised. Keeping an eye on interest rates is very important if you are opting for a loan. Thanks to the repo rate increase by the RBI, banks are planning to raise their lending and deposit rates as well. This means that car loan rates will also be revised.

It is important to note here that interest rates for most banks vary in accordance with tenure of the loan. The lower the tenure, the higher the charges. The repayment tenure is between one year and six years for most banks, barring SBI, which allows a repayment period of up to seven years.

From September, SBI has tightened its policy for auto finance. A person with an income of less than R6 lakh in a financial year is not eligible for an auto loan. The move was taken due to high inflation and slowdown in the economic growth. It is also meant to check bad debts of the bank while ensuring timely repayment by borrowers. There are higher chances of default in a scenario where interest rates are high and so is inflation.

Eligibility norms

Every bank has its own distinct criteria for providing a loan. Somewhat similar to home loans, auto loans are also sanctioned when particular eligibility criteria are met.

For example, ICICI Bank provides loan to a salaried person who is above 25 years of age at the time of applying for the loan. The upper age limit is 58 years at end of the loan tenure. The persons annual income should be minimum R2.5 lakh per annum. As stability in employment is also an important factor, the total number of continuous years in employment is more than two years.

For self-employed individuals the rules are bit more relaxed, the minimum and maximum age being 28 and 65 years, respectively. Also, gross annual income of R2 lakh is required. However, business stability of minimum three years is required from the work establishment.

Similarly, at Axis Bank, the minimum age for applying for a loan is 21 years, while the maximum is 60 years. Income eligibility is based on Form 16 and salary slip. Here as well, a minimum of two years of continuous job is required. The strictest norms among all banks seem to be of SBI. It only allows a car loan if the annual income is more than R6 lakh.

Most finances on a new car loan are given up to 85% of the on-road price of the vehicle, which generally includes registration of the vehicle, insurance, warranties, etc.

Some common documents requirement include ITR, copy of residence proof and passport-size photographs of the applicant. Office address proof in case of service individuals is also needed.

Before taking a car loan, try and save a good amount to pay as downpayment. For a middle-class income earner, a rate of interest up to 15% can prove to be uncomfortable. So, it is better that you save money and repay the loan as quickly as possible. Negotiate and try to seek options where your liability will be minimal. Dont default on the EMIs as it will impact your credit score.

The writer is CEO,