Car loans are offered by both banks and NBFCs and is one of the most sought after loans, as it has relatively longer tenure of seven years. But before you opt for that car loan, make sure to check out some crucial details which can affect your repayment schedule through the years.
Car loan eligibility is mainly dependent on two factors - the borrower's capacity to repay the loan based on his income and the price of the car. A good credit score and ample disposable income reflected through statements are also necessary for maximum loan disbursal.
For instance, if you are a salaried individual, the total amount of loan applied for cannot be more than your gross yearly income. Likewise self-employed and business owners have to show their repayment capacity with relevant proofs.
The primary documents required when applying for a car loan are:
- Address Proof for the City of Purchase
- KYC Documents
- Income Proof (Form 16 or Salary Slips for 6 months)
- Age Proof (Minimum 18 years)
Some dealers may also ask for a driver's license, but it is not mandatory for buying a car.
New car loan have interest rates that are lower than used car loans. Like home loans, both floating and fixed interest loans are available, where banks charge a rate based on their Marginal Cost of Funds based Lending Rate (MCLR) plus an additional spread. If you think the interest rates will be coming down in future then you can opt for the floating interest rate, or to pay a fixed amount, you can stick to fixed rate loans.
For new cars, the fixed interest rate offered by banks could range anywhere between 8.5 per cent and 11.5 per cent depending on the tenure, car cost, and borrowing capacity of the individual. Pre-owned car loans and those offered by NBFCs may attract a higher interest fee. The maximum tenure to pay back a car loan is seven years, whether fixed or floating.
Like other loans in the market, car loans may attract a processing fee. For advance payments there may be a pre-payment fee, and for early closure of the loan there may be a foreclosure charge attached. Make sure to check the percentage of these charges before finalising the lender.
The government has made it mandatory for all car and two-wheeler owners to possess third party insurance. You can speak to your car dealer to show you choices for different car insurances. You can choose a zero depreciation policy when you buy the car as it will help you maintain its value for the next few years for future insurance claims.
Car loans will in most cases only cover the ex-showroom prices and may sometimes cover additional accessories cost. Other costs, mainly road tax and insurance will have to borne by the customer. As of now a maximum of 90 per cent credit of the total cost of the car excluding road tax can be availed from banks.
When you buy a car through a loan, your car is hypothecated to the lender. Hypothecation gives the right to the lender to seize your asset, if you do not pay EMIs on time. Make sure you can pay your EMIs every month without fail. Once your loan is paid off, collect the relevant documents and forms from your lender to remove the hypothecation with your RTO.
(Adhil Shetty is CEO of Bankbazaar.com)
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