Car is an expensive asset and it may not always be feasible to make a full payment on it. Car Loan gives you the facility of buying your preferred car through borrowing some money from a bank or a financial institution and paying them back through affordable EMIs within a definite period. The flexibility in the loan tenures, lower interest rates, and facilities of taking loan for purchasing both used and new cars have made it easy for the Indian population to buy a car through loan facility.
While selecting the right car loan, you must consider more factors other than just the interest rate. The amount of loan, down payment, processing fee, tenure of the loan, credit score, EMI and the total interest amount that you will pay are some other parameters that would help you in making your decision regarding which car loan to apply.
In this article, we will learn about the working of car loans, eligibility, interest rates, documentation, EMI calculation process, application process and the best way to select the car loan in India.
What’s a Car Loan?
A car loan is a financial instrument where you can buy a new or a used car but not in cash but in installments. Car loans are offered by banks, NBFCs, or any other financial institution to the eligible people who pay back the money borrowed along with interest through monthly EMIs over a certain tenure.
In most cases, the individual needs to pay an initial amount of money which will be a percentage of the total cost of the car and the rest of the amount will be paid back over a certain period of time through monthly EMIs.
A car loan helps you buy a vehicle at ease by dividing the cost of the vehicle through monthly payments. However, it is essential for the individual to compare the interest rate, processing charges, loan tenure, EMI, down payment amount, and other charges offered by different lenders before applying for a car loan.
Key Features of Car Loans
Interest Rates
Let us begin with interest rates, which denote additional money paid for borrowed funds. These can either be fixed and remain constant for the whole period of the loan or variable and change depending on various factors. With a fixed interest rate, your payments will be predictable and quite stable; however, if they are variable, you may experience both drops and hikes that will affect your monthly payments in one way or another.
Loan Term
After this, there is the loan term which is a period when you have to pay off the debt. For auto loans, the period may range from 3 to 7 years, although there are longer ones as well. Shorter loan periods mean that you will be making larger monthly payments; nevertheless, you will be paying less interest. On the contrary, longer periods allow reducing payments but increase the interest cost.
Down Payment
The down payment is the first thing you should do before starting the process. It is the money you put aside as a down payment, typically 10-20% of the cost of the vehicle. The larger down payment you make, the smaller the amount you will have to take a loan for, and, consequently, your monthly payments will become lower, and interest paid on loans will also decrease. There are some lenders that provide you with zero-down options – sounds great, doesn’t it? Yet, be prepared to pay higher amounts later on.
Monthly Payments
Your monthly payment is a key aspect of your loan – how much you pay monthly to the lender. It depends on the amount of the loan, interest rate, and the term. The task here is to find an appropriate balance which won’t require too much effort from your part. After all, you have to save something for gas, insurance, and even coffee sometimes!
Fees
Don’t forget about the fees! In some cases, the loan might have some additional charges such as an origination fee (a fee for setting up the loan), a late fee if you do not make a payment on time, or even an early repayment penalty. What a scam, right? Make sure to read the fine print!
Collateral
And here is the catch—you use the vehicle as your collateral. It simply means that in case you fail to make the required payments, the creditor can seize it. It provides them with an additional safety measure.
Who’s Eligible for a Car Loan?
Car loan eligibility varies according to the lending institutions, but typically, banks and NBFCs provide car loans to salaried persons, self-employed individuals, and businessmen based on some requirements.
Car Loan Eligibility Requirements
- Age – Typically, the applicant needs to be 18-21 years old, and the upper age limit is usually 60-70 years at the time of repayment of the loan.
- Income – The applicant must have an adequate and regular source of income.
- Job/Business Stability – Lenders would typically prefer an applicant who has a stable job/profession or business.
- Credit Score – Having a good credit score might increase your chances of being approved for a car loan.
- Residential Status – Indian resident and, under some conditions, NRIs can avail of various types of car loans.
- Financial Obligations – Your EMI commitments, credit card payments, and other financial obligations are taken into consideration by the lenders while deciding your eligible loan amount.
- Documents – You will require identity and residential proofs, income proofs, bank statement, and vehicle-related documents.
In general, the following people can apply:
- Salaried employees of private firms, government organizations, or government departments.
- Professionals who run their own practice like doctors, lawyers, consultants, and architects.
- Owners of businesses and enterprises with an established business income stream.
- Existing customers of banks and NBFCs, who may sometimes get pre-approved loans.
Being eligible to apply for a loan doesn’t mean that your application will be accepted by the lender. The bank can still analyze your credit record, salary, debt-to-income ratio, job stability, etc.
Different Types of Car Loans
Various kinds of car loans can be found based on the purpose or the type of loan taken by the borrower who wishes to buy a new or used car or any specific car. Factors like interest rate, amount of loan, tenure of loan, and eligibility criteria of the loan may differ according to the nature of loan taken and the financial institution providing the loan.
Following are some of the commonly known types of car loans in India:
1. New Car Loan
This type of loan is taken to buy a new car from the authorized dealerships of the car. Banks/NBFCs may provide a major part of the cost of the car whether on road or ex show room depending upon the terms and conditions of banks/NBFCs.
2. Used Car Loan
This kind of car loan is taken to buy a used car. Interest rate charged by the bank or NBFC may be higher because of factors such as age, condition, model, etc. of the car.
3. Electric Vehicle (EV) Car Loan
There are special car loans available for electric cars offered by some lenders who might provide good interest rates or have other incentives depending on the lender and the programs.
4. Pre-Approved Car Loan
A customer of the bank with an excellent credit score will be offered pre-approved car loan. This is a loan which could facilitate the process but is still subject to approval from the lender.
5. Car Loan for Self-Employed Individual
A businessman and self-employed individual can take out a car loan according to his income, stability of the business and credit rating and the ability to repay the loan. The lender could ask for extra documentation like income tax returns and business documentation.
6. Car Loan for Salaried Individual
The individuals who receive salaries can get car loans by taking into consideration their monthly salary, experience in job, credit history and debts. Salary slip and bank statement can be used for analyzing repayment ability.
7. Car Loan for Luxury Cars
A few financial institutes and banks offer loans that cater to purchasing luxurious cars. The conditions for such loans are usually different from other loans.
Conclusion
Getting a car loan will be an easy way of buying a new car or a used one since the cost of purchasing the vehicle will be divided into monthly installments. The car loans available include loan for buying a new car, loan for buying a used car, loan for buying electric cars, loan for a salaried individual and loan for a self-employed person, depending on the borrower.
Taking a car loan requires making a long-term financial plan for the future. Before applying for a car loan, it is necessary to compare the interest rates, loan term, processing fees, advance payment, foreclosure, total cost of loan repayment offered by various banks. Equally important is choosing an installment that you can afford per month.
It will be wise to take a loan and buy the car you want while maintaining good financial planning.
