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 Things to know Before you Choose a Car Loan
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Things to know Before you Choose a Car Loan

A couple of things you need to keep in mind while trying to apply for a car loan. Although you might have your personal checklist of things to consider while buying a car, when it comes to applying for a loan, things are a little different.

The first step is obviously to lock on to the model of the car you want to buy. This will determine the price which in turn will determine how much you’ll need to borrow. Yes, the bank will have its own mode of evaluating how much you can borrow, however it is roughly based on the price of the car.Let us now take a look at the various aspects while you’re about to apply for car financing, because after all it is your money which is precisely why you need to end up with the best deal you possibly can.

1) Downpayment

It is the amount you will have to put forth through your own resources. i.e you will be able to avail a maximum of 70 – 80% of the price of the car. Which means, the rest 20- 30 % of the funding should be contributed from your personal resources. This is always a good idea, and keep in mind to pay the maximum possible down payment for your car.

Because, the longer you pay back your loan, the more you will end up paying. Whereas, if you have let’s say paid about 40% of as down payment, then you will need to avail only the rest 60% as a loan, here you can also avoid paying unnecessary interest amount. Here’s an example,

For example, if the cost of the car is ₹ 15 lakhs,

If you pay 50% as down payment,

Therefore,

  • Downpayment: ₹ 7.5lakhs

  • Your loan amount: ₹7.5 lakhs

  • Interest rate  13.25%

  • Tenure  5 years

  • Emi  16,974

  • Total Payment  =  Principal + Interest =           10,18,412

If you had paid only 20% as downpayment, then:

  • Downpayment:            ₹ 3 lakhs

  • Your loan amount:          ₹ 12 lakhs

  • Interest rate               13.25%

  • Tenure              5 years

  • Emi              27, 158

  • Total payment    = Principal + Interest =         16,29,458

Now you do the math and see which will work out better for you.

2) Interest Rates

The interest rates for a car loan depend on the tenure (loan repayment period) you’ve chosen and the loan amount you have taken.

Generally, the starting interest rate is 12% onwards although there are various offers you will be coming across from time to time.

3) Other Charges

The other charges for your car loan may vary from bank to bank, here are some of the common charges other than your interest rate:

- Processing Fee

- Preclosure charges

- Part-payment charges

- Stamp duty charges

- Late Payment Fee

4) EMI

The monthly installment for your car loan will depend on three things:

-Total loan amount

-Total Tenure

- Interest Rate

However, should you choose to pre close your loan or make type of part payment, your emi will vary accordingly.

5) Tenure

The tenure amount can be anywhere between 1 to 7 years. Again, this depends on the loan amount you’ve chosen and also on your income. For certain income ranges, there are certain fixed tenures which may not be known to you, till the time you apply for the loan.

Wondering why the tenure is important? Well for so many reasons:

  1. The longer your tenure, the more you end up paying.

  1. Sometimes, you need to make sure that you have the sufficient funds throughout the tenure of your loan – This could mean advance financial planning from your side!

  1. Just because the interest rate looks attractive for a 5 or 7 years tenure, it doesn’t mean you should take it up at just a glance. Take a moment to calculate the emi for a shorter tenure as well as a longer tenure and try to align it with your finances as well.

Let us understand this better with an example:

Example 1:

Loan amount: 5,00,000

Interest rate: 10.75

Tenure: 5 years

EMI: 10,713

Total Amount Payable: 6,42,780 (Of which, interest is 1,42,780)

Example 2:

Loan amount: 5,00,000

Interest rate: 12.75

Tenure: 5 years

EMI: 16,610

Total Amount Payable: 5,97,972 (Of which, interest is 97,972)

So, now do you get the difference between choosing the right tenure?

However, if you think you may not be able to manage a higher emi and a longer tenure, then you as well choose the one with a longer tenure.

6) Repayment Methods

You can repay your car loan in easy installments. You can also choose to preclose or pay lump sum amounts of your emis in one go. Always be sure to check out these features before you go ahead with the loan.

7) Cibil Score

Sometimes, banks do not offer loans to those who have had no previous history of loans or credit cards, however there are also some banks that provide loans for those who have no cibil score.

Also, please keep in mind that it would be quite difficult to avail not just a car loan but just about any type of loan for that matter will not be provided if you have a low cibil score. A low score indicates that you have not been able to keep up with your payments in the past.

8) Festive Offers & discounts

Very often, there are several festive offers and discounts that are available every now and then. You would definitely benefit from the lower interest rates, and attractive features. Sometimes, even your vehicle insurance is clubbed with your loan offer which is indeed an added convenience.

These are some of the useful check points you should look at before choosing a car loan and a car as well.

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About 

Priya Rai is a loan consultant.