Car loan has drastically improved the affordability of owing a car. If you are planning to avail a car loan, consider these factors before making the loan application.
Car loan has drastically improved the affordability of owing a car. All that one need is to pay a fraction of the car’s price as downpayment, and the rest of the cost can be financed in the form of EMI, at an affordable interest rate. Even the loan tenure can go up to 7 years. If you are planning to avail a car loan, consider the following factors before making the loan application:
Fetch your credit report before applying for car loan
Before approving your car loan application, lenders pull out credit report to check your credit worthiness. Many lenders also offer pre-approved car loans basis your credit score. Usually, those with credit score of 750 and above have higher chances of loan approval. Hence, make sure to fetch your credit report from online financial marketplace or credit bureaus at least six months before submitting your car loan application. Doing so would help you to know your credit score beforehand and also give you adequate time to take corrective measures for improving your credit score.
Compare your loan rates across all lenders
Interest rate for car loans usually start from 8.65% p.a. depending on the lender, car model, your repayment capacity, job profile and credit score etc. Some lenders also offer preferential rate of interest to the existing customers. Hence, check with your existing bank for such car loan offers and then visit online lending marketplace to compare loan rates with the rates offered by other lenders. Before making the final call, ensure to check car loan deals offered at the dealers or by the captive car finance companies.
Compare the loan to value (LTV) ratio
The LTV ratio of your car loan would be the proportion of your car’s ‘on road’ price financed by the lender. The remaining is margin or down payment amount, which has to be paid from your own fund sources. Since many lenders do not lend up to 100% of the car’s buying price, make sure you compare LTV ratio across all lenders. Try and make higher down payment as it leads to lower interest cost. Higher down payment might also help in availing loans at lower interest rate and better loan deals. However, while doing so, do not redeem your long term investments or exhaust your emergency funds as this can have an adverse impact on your future financial health.
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Check your EMI affordability
You can assess EMI affordability by deducting your mandatory monthly expenses, insurance premium, SIP contributions, existing EMIs, etc from your monthly income. Note that most lenders usually prefer total EMIs, including your car loan EMI, to be under 40% of your net monthly income. Once you know your EMI affordability, opt for the shortest tenure as per your affordability as this will lower your interest cost. However, do not compromise on contribution to your financial goals as that might adversely impact your future financial health.
Factor in processing fee
Processing fee for car loans can go up to 2% of the loan amount. Many lenders also reduce or waive off car loan processing fees during festive season. However, make sure that those lenders are charging higher interest rate or any additional charges to compensate for the concession or waiver of the processing fee.
Check the prepayment or foreclosure charges
Prepaying your car loan whether in part or full during the loan tenure can help in lowering your interest cost. Usually, lenders levy prepayment charges on car loans at a fixed rate, which can be as high as 5-6% of your outstanding loan principal. Also, some lenders put a cap on the number and amount of prepayments allowed during the entire tenure. Therefore, to ensure minimum penalty on making prepayment, ensure to choose a lender that imposes minimum restrictions and charges the least amount on prepayment.
(By Sahil Arora, Director & Group Head, Investments, Paisabazaar.com)