Owning a car is not a novelty anymore; one does not need to spend years waiting and saving to accumulate a corpus for it. All that we need is to pay a fraction of the car’s price in form of down payment money while financing the rest of the cost at affordable interest rates through car loan. However, with scores of lenders offering car loans with varying cost and features, choosing the optimum car loan is not an easy task.
Let’s look at step-by-step approach to find the best car loan deal:
Fetch your credit report before making loan application
As soon as you apply for a car loan, the lender will fetch your credit report from the bureau to evaluate your credit worthiness. Those with credit score of 750 and above usually have higher chance of loan approval at lower interest rate, while those with lower credit score may get loan at comparatively higher interest rate.
Fetch your credit report at least 6 months before applying for the loan. Doing so would give you sufficient time to take corrective measures for improving your credit score. Prior fetching of credit report will also help in detecting fraudulent errors and transaction, which once rectified, may increase your credit score and thereby, your loan eligibility prospect.
Compare loan interest rate across all lenders
Interest rate for car loans usually begin from 8.00 per cent p.a. depending on the lender, employer, car model, your repayment capacity, credit score, job profile, etc. To promote green initiative, some lenders offer additional concession on loan rates for purchasing electric vehicles.
Given that lenders offer preferential loan rates to existing bank customers, make sure you check the rate offered by your existing bank and then compare it with the rates offered by other lenders. While comparing loan options, make sure youalso check deals offered by dealer finance companies.
Factor in the processing fee
While processing fee for car loans can go up to 2 per cent of the loan amount, some lenders levy flat processing fee of up to Rs 15,000. Lenders often waive off or reduce processing fee during festive seasons. Also, make sure that the lenders are not charging higher interest rate or additional charges to make up for the waiver or concession in processing fee.
Compare the LTV ratio
LTV ratio is the proportion of your car’s buying price financed by the lender. The rest is the margin or the down payment amount, which has to be paid by you. Try to make higher down payment as this translates to lower interest cost. Making higher down payment may also assist in availing lower interest rate and better loan deals. However, avoid redeeming your long term investments or exhausting your emergency funds for making higher down payment. Doing so may force you to avail much costlier loans to meet your long term goals or financial exigencies.
Assess your EMI affordability
Assess your car loan EMI affordability by deducting your mandatory monthly expenses, SIP contributions, insurance premiums, existing EMIs, etc from your monthly income. Remember that most lenders prefer your total EMIs including your new EMI for the car loan to be within 50 per cent of your net monthly income.
Once you know your EMI affordability, choose the shortest tenure to reduce your interest cost. However, avoid compromising your contributions to crucial financial goals in the pursuit of making higher EMIs as that can adversely impact your long term financial health.
Check the prepayment or foreclosure charges
Prepaying your car loan, whether partially or in full during the loan tenure can help in reducing your interest cost. Lenders offering car loans on floating interest rates do not charge prepayment fee as RBI has barred them from penalising prepaymentof floating rate retail loans. However, lenders charge prepayment fee of up to 5 per cent of the prepaid amount and foreclosure fee of up to 6 per cent of the principal outstanding in case of fixed rate car loans. Some lenders also put a cap on the number and the amount of prepayments allowed during the loan tenure. Thus, if you want to keep the option of prepayment open, choose a lender with least possible restrictions and charges on prepayments.
By Gaurav Aggarwal – Director & Head, Unsecured Loans, Paisabazaar.com
