Most aspire to drive their own car but few have the necessary funds to buy it in one go with their own money. Car loans bridge this gap by allowing you to own your dream car by paying a fraction of its cost each month in the form of EMIs. If you too are planning to avail a car loan, consider these seven factors to land yourself a good deal on a car loan.
Loan rates — Compare them across all types of lenders:
Car loan interest rates start from 8.7 percent per annum onward, depending on your car model, repayment capacity, employer, etc. As many banks offer preferential car loan interest rates to their existing customers, first check with your existing bank for such offers and then visit online lending marketplaces to compare them with the rates offered by other lenders. Also, ensure to inquire the rates offered by dealer finance companies or captive car finance companies before making the final call.
EMI amount: Check your affordability
Apart from interest rates, your car loan EMI will depend on two other factors – loan amount and tenure. Check your EMI affordability by deducting your mandatory monthly expenses, existing EMIs, insurance premiums and SIP contribution from your monthly income. Also, remember that lenders usually prefer total loan EMIs, including your car loan EMI, to be within 40 percent of your net monthly income. While a higher EMI will certainly lead to lower interest cost, don’t do it at the cost of your emergency fund or your investments.
Loan tenure: Shorter the better
Most lenders offer car loan tenures of up to seven years. Try to opt for a shorter tenure as it will reduce your interest cost. However, as shorter tenure will lead to higher EMIs, ensure that your loan tenure does not cost your overall liquidity and contributions to various life goals.
Loan amount: Lower the better
While many lenders finance up to 100 percent of your vehicle’s cost, opt for a lower loan amount to reduce your interest cost. However, while doing so, don’t use your emergency fund or redeem your long-term investments as that might adversely impact your financial health in future. Plan well in advance to save and accumulate enough funds to make a healthy down payment to reduce the burden of the loan amount.
Processing fee: Read the fine print
Lenders charge this fee to cover the cost incurred while evaluating your loan application. This is usually a non-refundable fee, which can be as high as Rs 10,000. Many lenders also reduce or waive off their processing fees during festive seasons or through some offers. However, ensure that such lenders are not charging higher interest rate or other charges to offset their loss from reduction or waiver of processing fee.
Prepayment: Consider the charges, caps and other limitations
Prepaying your car loan amount is a good idea as it will reduce your interest cost. However, car loans taken on fixed interest rates usually come with prepayment or foreclosure charges of as high as 6 percent of the outstanding loan amount. Some lenders may also cap the number and size of prepayment allowed during a year and/or during the entire loan tenure. Thus, while selecting your lender, prefer the one with minimum charges and other limitations on prepayment.
Credit Score: Fetch your credit report before applying for a loan
Lenders will consider your credit score while approving your car loan application. Many have also started using credit score for fixing loan rates. Usually, those with credit scores of 750 and above have a higher probability of loan approval. Hence, fetch your free credit report from online lending marketplaces or credit bureaus before making a loan application. This will let you know your credit score beforehand and take corrective steps to improve it. Additionally, you may also receive pre-approved car loan offers based on your credit score and other eligibility parameters.
<<This article was originally published in moneycontrol.com>>