By Sahil Arora
Demonetization has led to an extremely favorable borrowing landscape for car buyers, with interest rates for car loans witnessing a steep decline. The big surge in low-cost deposits has forced banks to slash their MCLR rates, allowing customers to get their cars purchased at much lower interest rates. So, if you are looking to buy a new car, here are 8 things you need to keep in mind to ensure you get a good car loan deal:
1. Interest rate: The interest rates of car loans can vary anywhere from 8.5% to 14% per annum, depending on the lenders and your car model, monthly income, employer and loan tenure. As a small difference in interest rates can lead to a substantial difference in the overall interest cost, first check out with your existing bankers to get their preferential offers based on your existing relationship and compare them with the offers available from other lenders. As far as interest-rate type is concerned, prefer floating rate car loans, as you can benefit from the current scenario of falling interest rates and also make prepayments without incurring any penalties.
2. Loan EMI: Along with interest rate, your car loan EMI amount will depend on two other factors – loan amount and loan tenure. Make sure that you can afford the EMI before you take the final call. Consider your disposable income, your existing EMIs on other loans, insurance premiums and SIPs for long term investments before arriving at the EMI figure. As a thumb rule, do not let your total EMIs, including your car loan EMI, to cross 40% of your monthly income. Never compromise on your contribution towards long-term financial goals to pay higher EMIs.
3. Processing Fees: Lenders charge this fee to cover the cost incurred while evaluating your loan application. This is usually a non-refundable fee, which can range anywhere from Rs 1,000 to Rs 10,000. Various lenders offer discounts or waive off processing fees, especially during festive seasons. However, make sure that the savings made on processing fees is not offset by higher interest rates or other charges.
4. Prepayment Charges: Although prepaying your loan amount is a good idea as cars depreciate in value with time, loans with fixed rate of interest have prepayment charges up to as high as 5% of the outstanding loan amount. Many lenders may also have caps on the number and total amount of pre-payments allowed during a year and during the entire loan tenure. Thus, while shopping for a car loan, prefer the one with minimum limitations and charges on pre-payments.
5. Loan Amount: Different lenders have different criteria on how much of the total car price they will finance. As a borrower, try to pay maximum downpayment on your car out of your own pocket to bring down the loan amount. But do not use your emergency fund or long-term investments to make a higher downpayment.
6. Loan Tenure: Most lenders offer up to 7-year tenure on their car loans. The longer the loan tenure, the higher is the interest cost. As cars are depreciating assets, it makes sense to repay your loan as fast as possible. However, shorter tenure leads to higher EMIs. So, first determine how much EMI you can pay and then fix the loan tenure accordingly.
7. Credit Score: Credit score is one of the major factors that lenders will consider while approving your car loan. Many lenders have also started using credit score for setting interest rates. Usually, a credit score of 750 and above is considered as a good score. Thus, fetch your credit report prior to your car loan application. In case it is low or contains any errors, fix them before applying for a loan. You can fetch your credit report online for free from a financial marketplace.
8. Compare loan offers online: To get the best car loan deal, it is critical that you compare offers from different lenders. Visit online marketplaces like paisabazaar.com to compare the various car loan offerings available on your monthly income, car model and other parameters. Also, ensure to compare the loan offers from dealers and manufactures before making a final call.
(The author is VP & Head of Payments Products, Paisabazaar.com)