Car Loans for the first time

Buying your first car is a moment of joy and pride for you. It's often an indicator that you're financially stable, upwardly mobile, and ready for bigger challenges in life. If you have ready cash for your car purchase, read no further. However, if you want to understand the process of buying a car on loan, here are some tips.

WHAT A CAR COSTS
On top of the showroom price, buying a car entails costs towards insurance, road tax, registration, and GST on factory price as well as on insurance. These constitute the on-road price towards which a loan can be taken. By visiting a showroom or websites, you will be able to ascertain the final price. You will also incur extra costs towards accessories, and charges towards your car loan, like loan processing fees.

NEW CAR OR USED CAR?
The second thing you need to consider is whether you want to buy a new car or a used car. There are loans available on both options. Thanks to a growing network of used car sellers, you can avail your dream car at an attractive price. However, loans on used cars typically carry a higher interest rate.

AGE & INCOME ELIGIBILITY
To be able to take a loan, you need to pass age and income eligibility criteria of lenders. There’s a minimum and maximum age cut-off. Typically, lenders need you to be over 21 and under 65. If you’re self-employed, the norms may be more stringent, but this varies. Some lenders need you to be employed for a certain number of years and/or be above an income threshold. For example, one lender says you must be earning more than Rs 2.4 lakh per year to apply for a loan.

LOAN ELIGIBILITY
Each lender will have their own criterion for deciding your eligibility. Most lenders will fund up to around 85 per cent of the on-road price. The rest will have to be paid by you. There are lenders who’ll go up to 100 per cent. Even if you don’t get a 100 per cent approval, you can make your down payment with your credit card to buy the car 100 per cent on credit. However, you should only do so if your monthly income allows you to.

FIXED RATE OR FLOATING RATE?
On your loan, you have to pay interest. Loans can have either a fixed rate of interest that remains static through the loan tenure, or a floating rate that changes as per the prevalent macroeconomic conditions. As of February, the interest rates on offer vary between 8.70 per cent and 17 per cent. You can choose between fixed-rate loans or floating rate ones.

LOAN TENURE
Tenure will vary between 1 to 7 years. A longer tenure would mean smaller EMIs but also higher interest payments. For example, you borrow Rs 4 lakh at 9 per cent. If you borrow for 5 years, your EMI is Rs 8,303 and total amount repaid would be Rs 4,98,201. If you have a tenure of 7 years, your EMI is just Rs 6,436, but you would need to pay Rs 5,40,593. Don’t opt for a smaller EMI if you can pay a larger one.

EMI IN ADVANCE VS. EMI IN ARREARS
Some banks allow you to pay EMIs in advance. Here, the first EMI is made in advance to the lender and is purely a principal payment with no interest. The loan is disbursed minus this amount. Conversely, EMI in arrears mean the loan is disbursed without this initial payment. Therefore, the total interest paid is marginally higher. If you choose the first option, you can save a small sum in the long run.

PROCESSING FEES
For your loan, you will be charged a processing fee. It may be a variable amount (example: 0.5 per cent of loan up to fixed limit), or a fixed amount (example, Rs 4,000), or it may be waived off from time to time. You should bargain with your lender about these charges, and get them to lower them or waive them off.

PRE-PAYMENTS AND PRE-CLOSURE
Pre-payment and pre-closure of loans help you save on interest costs. If you actively pre-pay the principal on your loan, you can reduce its tenure and save yourself a lot of money in the long-term. However, on most car loans, pre-payments aren’t a given. Pre-payment and pre-closure may or may not be allowed. If they’re allowed, it may be at a cost or at certain conditions. For example, one bank will charge you 6 per cent of the outstanding loan for pre-payment in the first 12 months.

CREDIT SCORE
If you’ve been using a credit card or have availed a loan in the past, you should be aware of your credit report. It is a summation of your borrowing history: what you’ve borrowed, when you’re repaid, whether you’ve been late in repayments, and so on. In your report, you will see your credit score. Today, borrowers with credit scores of 750 or more can avail the best loan offers. You don’t need to apply for a loan to know your score. You can do so now, for free. Just Google “free credit report” and get yours in just two minutes.

DOCUMENTS NEEDED
Typically, the documents needed to avail a car loan are your identity  and address proof, income proof (salary slips, Form 16), PAN card, bank statements, and employee ID which can help you avail corporate discounts.

COMPARE OPTIONS
When you’re taking a loan, you don’t have to settle for the first loan offer that comes your way. Firstly, check for pre-approved offers from your existing banks. These may be attractively priced. Second, go online to quickly explore the full marketplace of car loans. You will be able to instantly see the best interest rates, lowest processing fees, and quickest disbursals.

The writer is CEO, BankBazaar.com