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 the gap of low funds by allowing you to own your dream car by paying a fraction of its cost each month in the form of EMIs. You should keep in mind these factors to get a good deal on a new car loan.
Compare loan rate across
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 the dealer finance companies or captive car finance companies before making the final call.
How much can you afford?
Apart from interest rates, your new car loan EMI will depend on two other factors – loan amount and tenure. You should decide your EMI amount by subtracting your regular monthly expenses from your monthly income and then see how much you can use in your EMI. Pro tip – banks prefer all your EMIs, to be within 40 percent of your net monthly income.
Loan tenure: Shorter the better
Banks offer car loan for up to seven years. Try for a shorter tenure as it will reduce your interest cost and you would be EMI free faster.
Loan amount: Lower the better
Many banks can finance up to 100 percent of your vehicle’s cost but, you should opt for a lower loan amount as it would reduce your interest cost. 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 terms and conditions
Processing fee covers the cost incurred while evaluating your loan application. This is usually a non-refundable fee, which can be in five digits value. Some banks reduce or waive off their processing fees during festive seasons or some offers. Ensure that banks are not charging a higher interest rate or other charges to balance their loss from reduction or waiver of processing fee.
Credit Score: Get your credit report before applying for a loan
Banks 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. You may also receive pre-approved car loan offers based on your credit score and other eligibility parameters.
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 banks may also cap the number and size of prepayment allowed during a year and/or during the entire loan tenure.