The joy of a first time car buyer is justifiably very high, but in the excitement of buying a new car, people sometimes do not pay attention to the details of the car loan. Careful consideration of car loans is very important, and the basics to keep in mind before applying for a car loan are even more so. There are certain points one should always keep in mind before a car loan and it is also important to take some time to consider and compare the car loan options offered by multitude of banks to make the loan more suitable for one’s individual purpose. Reading the terms and conditions of a given car loan is one of the primary things that one should do.
Here is a look at some of the must know things before applying for a car loan.
Eligibility for Loan
Car loans are offered to both salaried service holders and self employed people who file regular IT returns. Depending on a person’s personal relations with a particular bank over the time, as much as up to 90 percent of a car’s value can be obtained as car loan. Moreover, various banks have various terms for the different car models available in the market. Banks always verify the personal income tax statements before deciding the overall loan limit that has to be offered to each of the client.
Importance of Credit Score
Credit score plays a very important role in getting an applied car loan sanctioned. All the banks do a background check of every client’s credit history including that of the Credit Information Bureau India Limited or CIBIL score. Thus, one should pay great importance in keeping one’s credit history clean by paying each EMI of any loan on time and not being a defaulter. People with a bad credit history or with a poor CIBIL score are most likely to be declined by a bank for car loans. Basically a credit score of over 700 points is considered good, and the banks should approve a car loan application for such clients.
Interest rates are one of the most crucial things to consider in a car loan similar to any other loans. This decides the installment amount that a person needs to pay each month as the EMI of the car loan. As a given, the Public sector banks offer car loans with slightly lower rates of interest than the private banks. Interest rates vary based on the duration as well as type of car loan chosen by a person. People can choose between fixed interest loans or floating interest loan types, as per personal convenience. Fixed rate interest rates are more common and are preferred by borrowers who feel comfortable with a sure fixed EMI each month. However, depending on a particular time, when interest rates are expected to fall in the near future, going for a floating interest rate is also a good option. It is to be ensured that a car loan is of a reducing balance type that reduces the principal of the loan after each paid EMI.
Various car loan schemes are available in the market, where finance companies offer up to 90 percent of loan of a car’s value. However, in few rare cases non banking finance companies and even banks offer 100 percent finances under special schemes in association with the car dealerships for some limited models and are usually seasonal. After the percentage of loan acquired, the rest of the value of a car is usually paid up front while buying the car as a down payment.
Thus, more the down payment of a car, the less is the car loan. Usually higher loan amounts (percentage of the car value) come with higher interest rates, thus the final cost of the car at the end of the loan tenure is also higher. Thus, it is always better to make less loan amount and pay the maximum down payment possible to make the car purchase to decrease the cost of ownership in the long run.
Car loans usually come with tenures between 1 and 5 years. Few banks offer car loans of up to 7 years. Longer the tenures while lowering the EMI amount for each amount, also increases the final payment of the total interest. Thus, it is also good to take a car loan with the minimum tenure possible again to reduce the final cost of the car.