If you too are planning to avail a car loan, consider these six factors to land yourself with a good deal.
Car loans have drastically improved the affordability of owing a car. All that you need is to pay a fraction of the total cost as the down-payment amount. The rest of the cost can be financed through loans at affordable interest rates, which can be paid back over tenures of up to 7 years in the form of EMIs. If you too are planning to avail a car loan, consider these six factors to land yourself with a good deal.
Fetch your credit report before making loan application
While evaluating a car loan application, lenders check your credit report to assess your creditworthiness. Many lenders also offer pre-approved car loans based on your credit score. Generally, people with credit score of 750 or above have a better chance of loan approval. Some lenders also charge lower interest rates to those having higher credit scores. Therefore, fetch your credit report from the credit bureaus or online lending marketplaces at least six months before applying for the car loan. This will allow to you to check your credit scores beforehand and give you sufficient time to take corrective measures for improving your credit score. Prior fetching of your credit report will also allow to detect errors and fraudulent transactions, which once rectified might improve your credit score and, hence, your loan eligibility.
Compare interest rates across all lenders
Interest rates on car loans can be anywhere between 8.80% and 16%, depending on the lender, car model, employer, repayment capacity, credit score, etc. Many lenders also offer preferential interest rates to their existing customers. Hence, first check with your existing bankers about their car loan offers, if any. Then, visit online lending marketplaces to find out the best offers from other lenders available on your income, credit score and other eligibility parameters. While comparing options, ensure to check out the car loans offered by dealer finance companies.
Loan to Value (LTV) ratio
This ratio is the proportion of your car’s purchase price that will be financed by the lender. The rest, also known as margin or downpayment money, has to be paid from your own funds. As all lenders do not lend up to 100% of the car’s purchase price, ensure to compare the LTV ratio offered by various lenders. However, always try to make higher downpayment as that will translate to lower interest cost. A higher downpayment can also help you in availing lower interest rate and other better loan terms. While doing so, do not exhaust emergency funds or redeem long-term investments as that can adversely impact your future financial health.
Assess your EMI affordability
Check your EMI affordability by deducting all mandatory monthly expenses, such as household expenses, existing EMIs, insurance premiums and SIP contributions for crucial financial goals from your net monthly income. Remember that most lenders prefer your total EMIs, including the new car loan EMI, to be within 40% of your net monthly income. Once you are aware of your EMI affordability, prefer a shorter tenure as that will reduce your interest cost.
Do not ignore the processing fee
The processing fee of your car loan can go up to Rs 10,000. While many lenders reduce or waive off their processing fees during festive seasons, make sure that you are not being charged higher interest rate or any additional charges to make up for the concession or waiver of the processing fee.
Check foreclosure or pre-payment charges
Making prepayment of your car loan can help in reducing your interest cost. However, many lenders levy prepayment charges on car loans lent on fixed rate loans, which can go up to 6% of your outstanding loan principal. Some lenders also cap the number and amount of prepayments allowed within a year or during the entire tenure. Therefore, while selecting your lender, choose the one that imposes least restrictions and charges the least on making prepayments.
(The author is Director & Group Business Head – Investments, Paisabazaar.com)