Car Loan – Boon or Bane!

Buying a new car is always a thrilling experience. What makes it more attractive is that it is relatively easy as compared to earlier times, thanks to the various car loan schemes offered by different banks and financial institutions.

A new car would always be a prized possession but it is an expensive possession too, more so if it has been purchased through a financing scheme. The age-old adage that “knowledge is powerful than money” holds good here than anywhere else to make informed financial decisions with some research done on a few factors like the car loan interest rates,  the minimum processing fees etc., which would help in getting the best out of your finance.

With financing company representatives generally available inside the car dealer’s showrooms, getting a loan for financing your car purchase may seem relatively a cake walk. But what you need to understand is that a debt-is-a-debt-is-a-debt, and hence a better understanding of the car loan options will help you in saving more on your debt.

Ask yourself the following questions before you finalize your car loan:

Quantum of Loan

 The amount of loan that you would be able to serve without disturbing your budget would be one where the equated monthly installments do not exceed 15-20% of your net monthly income. Remember that your prized vehicle is the security against the loan and the Bank reserves the right to repossess and sell the car in case you fail to repay the loan in time.

The interest rate on Loan

 One of the most pertinent questions should be the interest that is charged by the Banks on the car loan. While it may be common for banks offering existing customers with a better interest rate, it is advisable to compare the rates offered by different lenders before finalizing the loan.

Tenure of Loan

The tenure of the loan should be kept as minimum as possible to the extent that the EMIs does not affect your cash flows. Lower tenure means lower interest burden and also allows easy transfer of the vehicle in case of any need to sell. However, you also need to consider that some banks offer lower interest rates for higher tenure and also you can avail the benefit of any reduction in interest rates in future. Hence a balanced EMI with a sensible tenure should be chosen.

Margin money on Loan

Though some banks now offer up to 100% finance on car purchases, it is always advisable to use your own finances to make the payment of at least around 20% of the value of the vehicle. Understand that higher finance may look lucrative initially but it is actually eating up more of your money in the form of EMI.

Documentation for Loan

Whereas the basic income and KYC documents would be a necessity with almost every financing agency, check out for lenders who ask for minimum documentation. Further, avoid lenders who may insist upon any additional security than the vehicle being financed. It is advisable to keep all the necessary documents handy at the time of loan application so that the period of loan sanction and disbursement is reduced.

Additional fees on the Loan

While many of the fees may be inevitable, it is always advisable to inquire about the charges and fees applicable both at the time of sanction as well as full repayment of the loan. Charges may vary between lenders but one should compare these additional fees and charges of various lenders before taking a decision.

Prepayment of Loan

With many banks levying prepayment charges, foreclosure charges or other fees for repayment of the loan before the initially agreed tenure, one should choose a bank that has nil or at least minimum charges in such case based on the tenure after which such prepayment happens.

Choose a car loan and a lender which answers all your questions adequately and to your reasonable satisfaction.

Stay informed about this so you don’t end up buying a hatchback and paying for a Merc.

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