With close to 80 per cent of car buyers in India going in for a car loan, banks market this product aggressively to potential car buyers. But as a buyer, it is important to consider a few key factors while you opt for a car loan. The following are some parameters to be considered and evaluated:

Interest rate

The first, and the most important, factor to be considered is the interest rate charged by the bank. Do your research well before you choose a bank, as interest rates can make a huge difference to the EMI you pay. Interest rates vary depending on the car model, duration and type of the loan (fixed or floating rate loans). If you have an existing relationship with a bank, there are chances that you might get some concession on the interest rate. Public sector banks offer lower interest compared to private banks in India.

Credit History

Nowadays, banks check on your credit score before approving your loan papers. Make sure you have a clean credit history if you wish to apply for a car loan.

Eligibility factor

Banks approve car loans based on the eligibility factors set by them. For example, some banks approve loans by looking at your monthly take home salary. Hence do your calculations before you decide on the car and the amount of loan you want.

Down payment

Like a home loan, car loans also demand a down payment, which is the margin amount contributed by the borrower. Although a lower down payment will be easy on your finances at present, it means you have to take a larger loan which means higher EMI every month.

Third Person Guarantee

Sometimes banks insist on having a third party guarantee for the loan you take. Hence make sure you have a friend or relative who can guarantee your loan. Banks may choose to waive this requirement if you have a good credit history.

Processing fees

Banks may charge a processing fee on your car loan, which is either a flat fee or a percentage based on your loan amount. Other charges like late payment fees are also levied by banks if you delay your EMI payment. This is usually around 2 per cent per month on the outstanding amount. Remember to compare these charges by various lenders when you look for a car loan.

Foreclosure charges

If you find yourself with extra cash, you may want to part pre-pay your loan or foreclose the same. However, not all banks allow you to part prepay your loan. Some banks allow you to part prepay but may charge you prepayment fee. Another area where borrowers are charged is when they wish to foreclose the loan. Remember to check on these charges before opting for a loan.

Beware of packages

Sometimes dealers offer car loans along with the car and accessories, as they have tie-up with financiers. The dealer gets a commission from the financier for sourcing the loan. It is easier to take pre-approved loans from dealers from a convenience standpoint. But do such loans make financial sense? Not necessarily. You must evaluate various options in the market before you think this is attractive. Further, the EMI offered on the loan by the dealer may be low while the price of the car may be hiked up, or vice versa. Therefore, a loan offered by the dealer should be evaluated carefully.

Check on the insurance

Insurance is generally packaged and sold by the dealer along with the car. If you feel that the insurance offered is overpriced or has terms which are non-beneficial, feel free to ask for a different insurance cover.

Current investments

Before you apply for a car loan, it is advisable to have a look at your current investments and see if you have any asset which is non-performing or which is earning an interest lesser than the interest rate of car loans in the market. If you can partly finance your car with this amount, you can reduce the loan amount. Car loans are tax inefficient and also carry high foreclosure charges. So it is always better to optimise the amount borrowed.

The author is CEO of Bankbazaar.com