An auto loan is an easy and quick way to arrange funds to buy a car, bike, or scooter. Often buyers, especially the first timers, can take hasty decisions with their financing and overlook the factors necessary for landing a good loan deal.

Let’s look at the top five common mistakes to avoid while opting for an auto loan.

Over-Stretching Budget

It is natural to get tempted to spend more than your budget. This can be avoided. Before jumping to the final decision, assessing your repayment capabilities is advisable. It’s worth reminding you that if the loan amount is higher than your need, the monthly equated instalments (EMIs) will be higher too. This can lead to a longer tenure if you are not comfortable paying higher amounts EMIs. In short, stick to your budget.

Not Checking Credit Score

Your credit score is crucial in helping you get financing at the cheapest possible interest rate. If you know your credit score in advance, you are in a better position to bargain for a lower rate or attractive offers and deals you might be eligible for. Therefore, you must check your credit score before applying for any loan. Google “free credit report” and get yours in a couple of minutes.

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Longer Tenures

The common understanding among customers is if they spread out a loan over a longer tenure, they have to pay lower EMIs. That’s absolutely correct. But in the end, a buyer will end up paying more interest outgo. One should choose an optimally long tenure. This will keep interest outflows at an optimum level. For instance, if you go for a Rs 5 lakh vehicle loan, say at a 10 per cent interest rate with a loan repayment tenure of 7 years, your monthly EMI will be about Rs 8,300. In the entire 7-year term or 84 months, you will pay Rs 697,200, with interest of Rs 1,97,200 over and above the loan amount of Rs 5 lakh. On the other hand, if the loan tenure is 3 years with the same interest rate, the EMI will be Rs 16,133. Thus, you will pay a total of Rs 5,80,788 – thereby substantially reducing the interest portion to Rs 80,788.

Ignoring Loan Comparison

A vehicle loan applicant must compare loan offers by various lenders. The offers depend on your eligibility. Select the deal with the lowest interest rates possible and other features. Even a 10-20 basis points lesser loan interest rate does make a sizable difference in your EMIs through loan tenure.

Selecting No Down Payment Plan

The thought of not having to make a down payment on your dream car sounds very tempting. It means driving your car out of the showroom without paying a single rupee. Zero down payment implies that you will pay more on future EMIs, resulting in a higher interest outflow. Moreover, there are hidden charges and fees that people generally forget to factor into this equation. Thus, you should arrange a minimum of 15-20% of the actual cost as down payment and take a loan for remaining amount.

Try not to take decisions in haste about the vehicle and loan. Research about the vehicle, price, features, and amount you will need to borrow. Select a fuel-efficient vehicle that requires low maintenance and is not beyond your budget. Check the down payment and assess how much you can borrow to repay the lender comfortably. You can consider your monthly income and divide the money in hand for multiple expenses. It will help you assess your affordability. Finally, you must read the loan terms and conditions and get clarity from the lender regarding all the doubts you may have. It will ensure your loan journey is smooth and trouble-free.

(The author is CEO, Bankbazaar.com)