Getting a car loan has made it quite easy to own a car. Previously, purchasing a car through a loan was a cumbersome process, but thanks to current initiatives of banks and the automation of most procedures, getting a car loan is today a rather simple process.
Now, a person can purchase a car for a small portion of the price and pay the balance over time through EMIs. Even though there are many loan options available, there are still a few checks and balances that must be passed before receiving a car loan.
Buyers frequently make rash decisions regarding their finance, especially first-time buyers, and fail to consider the elements required to secure a favourable car loan offer. We shall examine those factors in this article that one must consider before applying for a car loan and also discuss the mistakes that one must avoid before applying for a car loan.
What should you look into before taking a car loan?
Checking your preferred bank’s car loan eligibility requirements is the first and most important step in applying for a car loan. The minimum age, minimum annual income, employment status, and/or any additional requirements the bank may have are among these. The requirements are different for each bank.
• Valid licence
You need a current driver’s licence in order to apply for a car loan. This demonstrates that, even before possessing a car, you are legally permitted to drive. If you lose your licence, it expires, is cancelled, or both, your car loan may be terminated. Before approving the car loan, the lender must confirm that you are a responsible driver.
• Vehicle class
Your eligibility for a car loan is also determined by the kind of vehicle you intend to purchase. The resale value of the car affects the eligibility for a car loan because a car’s value depreciates over time and each one has an estimated resale value based on features and specifications. So, the higher the car’s resale value, the higher the eligibility for a car loan.
• The value of your employer
The name of the firm and the brand may not always have an impact on eligibility, but it occasionally helps to raise one’s chances of getting a car loan. An employee of a tier-1 or high-ranking company may be eligible for a larger loan amount than an employee of another organisation. Therefore, it is crucial to have a greater salary in order to have a higher loan amount approved.
Mistakes that one must avoid while applying for a car loan:
- Exceeding the budget
It is normal to feel tempted to go over your spending limit. This could be prevented. It’s wise to consider your repayment capacity before making the ultimate choice. It’s important to remember that the monthly equated instalments (EMIs) would also be higher if the loan amount is greater than your demand. If you find it difficult to make larger EMI payments, this could result in a lengthier loan term. In short, adhere to your financial plan.
- Not examining credit report
In order to secure financing with the lowest interest rate possible, your credit score is essential. You are in a better position to negotiate for a lower rate or appealing offers and deals you might be eligible for if you are aware of your credit score in advance. Therefore, before requesting any type of loan, you must verify your credit score. Get yours by searching for “free credit report” on Google.
- Taking car loan for a longer tenure
Customers typically realise that if they spread out a loan over a longer term, they will have to pay lesser EMIs. However, the buyer will ultimately pay a higher interest expense. The ideal tenure should be selected. By doing this, interest outflows will remain at their ideal level. For instance, your monthly EMI will be about Rs 16,601 if you take out a Rs 10 lakh vehicle loan at a 10% interest rate with a 7-year repayment period. You will pay Rs 13,94,499 over the course of the 7-year period, or 84 months. You will pay Rs 3,94,499 in interest on top of the Rs 10 lakh loan. The EMI, on the other hand, will be Rs ₹32,267 if the loan is taken out for three years at the same interest rate. By paying a total of Rs 11,61,619 you will significantly lower the interest component to Rs 1,61,619.
- Not doing holistic comparison
An candidate for a car loan must examine loan offers from several lenders. The offers are subject to qualification. Choose the offer with the best features and lowest interest rates. Your EMIs over the course of the loan lifetime can vary significantly by as little as 10 to 20 basis points in loan interest rate.
- Choosing the No Down Payment option
It sounds quite alluring to not have to put down a deposit on your ideal vehicle. It entails removing your car from the dealership without making a single payment. With no down payment, you must assume that you will pay more in future EMIs, which will increase your interest expense. In addition, there are additional costs and levies that are frequently overlooked in this calculation. As a result, you should set aside a minimum of 15%–20% of the total cost as a down payment and obtain financing for the balance.
Key takeaway Avoid making hasty decisions on the car and the financing. Do some research on the car’s pricing, features, and required loan amount. Choose a car that uses less fuel, has little maintenance, and is within your economic capacity. Check your down payment and determine how much you may borrow to comfortably repay the lender. You might divide the cash on hand for various expenses according to your monthly income. It will assist you in determining your affordability. Finally, you must study the loan terms and conditions and clarify any questions you may have with the lender.