Do you need that car loan? Here are pointers on things to look out for before applying

Oct 05 2013, 10:56 IST
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A car loan is, however, a double-edged sword. A car loan is, however, a double-edged sword.
SummaryIt may seem like you're easing burden by paying in small chunks, but you could end up paying a lot more.

Car loans can be deceptive. It may seem like youíre easing the burden by paying in small chunks, but you could end up paying a lot more. We give you pointers on things to look out for before applying

Buying a car on a finance scheme gives buyers the liberty of not having to invest a large chunk of their savings in a single investment. Whatís more, finance schemes are available on almost every car on sale here. Finance companies offer loans of up to 90% of the carís value, or in some cases, even the entire amount, depending on the repayment scheme and the model of the car. Our advice would be to pay as much as possible in terms of downpayment, so that the amount you return over the years (with interest) is minimised. A downpayment is the initial payment made when the car is financed, whereas the remaining amount is paid in small chunks, called instalments, over a period of time.

A car loan is, however, a double-edged sword. For starters, while it does allow you the flexibility of paying the overall amount over a certain period of time, one must keep in mind that you will have to pay back much more to the bank. As an example, on a loan of R6 lakh at an 11% rate of interest, you will have to pay back approximately R36,000 for every lakh borrowed over a three-year scheme or R60,000 over a five-year scheme.

Itís also worth noting that some loans will be offered on the ex-showroom price of the car. Itís easier on your pocket if you negotiated with the bank and got the loan based on the on-road price, as the loan will cover registration charges, insurance, road tax, and a few other costs. Also, some banks may have a really large processing fee, but if your credit history is clean, itís very likely that youíll get a waiver on your processing fees.

Listed below are the various parameters you should be aware of before applying for a car loan.

Eligibility & credit history

Banks set some criteria that need to be fulfilled by the loan applicant before a loan is granted. The bank verifies your income statements for a certain duration before deciding on the loan amount they deem fit to fund. They also go through CIBIL (Credit Information Bureau India Limited), which maintains records of your loans and credit card transactions that are submitted to the bureau every month by banks and credit card companies. Based on these records, they generate a CIR (Credit Information Report) via which a credit score is generated. Generally, a credit score of more than 700 is considered good, and makes a strong case for getting the car loan sanctioned.

Rate of interest

One of the most important factors to consider before applying for a car loan from a particular bank is the rate of interest, as it can decide your instalment amount and the total amount you will be paying above your borrowed sum at the end of the loan tenure. Interest rate charges differ according to the duration of the loan and the type of interest scheme chosen. This can be classified into two typesófixed and floating. Fixed interest rates remain constant during the tenure of the loan, whereas a floating interest rate changes according to the trends in the market. To play it safe, opt for a fixed interest rate loan.

Public sector banks generally offer lower rates of interest to the tune of 10.1-12%, with loan tenures of seven years maximum. On the other hand, private banks offer loans at a higher rate of interest of around 12.5-15%, with the advantage of having less documentation required and better service quality. Most of the loans offered nowadays are of the reducing balance type. In this scheme, as you pay the EMIs, your principal amount decreases and interest is levied on the remaining reduced amount and not the entire principal sum.

Itís also worth noting that having a long-standing relationship with a particular bank can get you good offers. Car loans are also customised according to car models; popular ones generally get the best loan offers as compared to slow selling models. Get all the options on the table before selecting the right one that meets your requirements and expectations.

Package deals

A convenient option is to take a car loan from the purchased carís dealer as they have bank representatives or tie-ups with banks to offer lucrative deals as part of a package that includes loans, insurance waivers/discounts and car accessories. Dealers earn a commission on the items they sell, but sometimes, a little higher interest rate or insurance package maybe negated by the accessories offered free with the car. Itís better to evaluate the options from the dealerís side, as well as directly from the bank or insurance company to ascertain the best deal before taking the plunge.

Avoid penalties

An important factor to consider when choosing a bank loan is foreclosure, which, simply put, is the closing of a loan earlier than agreed by paying off the remaining debt. On a recent ruling by the Reserve Bank of India, a verdict was passed wherein prepayment (making a payment thatís more than your regular EMI, hence reducing the principal amount that has to be paid back) penalties for loans that have been purchased on a floating rate of interest will be waived. If a foreclosure of the loan is on the cards, be prepared for high foreclosure. A penalty for the same is waived if the next loan is purchased from the same bank after the closure of the earlier one. Some banks also do not allow you to foreclose before a certain period.

Other charges

Bank loans come with other charges like processing fees and late payment fees. Some banks charge a flat processing fee while others charge a percentage of your loan amount as processing fees. A late payment charge, generally to the tune of 2%, is also levied on the EMIs. These charges, although minor in number, should be evaluated as part of the decision making process. As an example, on an EMI of R10,000, and with a 2% penalty fee charged, your overall EMI for that particular month would be R10,200.

Itís clear that thereís a fair amount you should be aware of before considering a car loan. Different banks offer varying loan rates in an attempt to lure customers, so itís important to consider these aspects before zeroing in on a finance scheme.

Itís important to remember that CIBIL maintains records of your credit history, based on which a credit score is generated. This will determine how credit-worthy you are, and the better the score, the better your chances are of getting a loan amount required by you approved.

Whatís more, a long-standing relationship with a bank can also go a long way in helping you get a finance scheme that suits your needs the best, with little documentation required.

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