All the major private and public sector banks offer auto loans very easily and at very competitive interest rates. With so many options available, auto financing can confuse the borrower. However, by keeping these six dos and don’ts, you may be able to get the right car loan:
1. Get your credit report back before applying for a car loan
Interest rates on loans are determined by parameters such as source of income, gender, and credit rating. If you have a high income but a bad credit rating, your loan rate may still be high. Lenders retrieve credit reports from auto loan applicants to check their creditworthiness. “Those with a credit score of 750 and above are generally more likely to get loan approval. Many lenders also offer preferential loan rates to those with higher credit scores. Therefore, those who are considering availing an auto loan should collect their credit reports from the credit bureaus at regular intervals of at least six months before submitting their auto loan application, ”said Gaurav Aggarwal, Director of Paisabazaar.com.
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2. Know the interest rates and fees
The auto loan market is diverse and rich in options. Hence, you can go online to compare your options with the lenders that you prefer. “A declining balance loan with a low interest rate and low charges is ideal. Beyond the interest rate, know what the different loan fees are, ”said Adhil Shetty, CEO of BankBazaar.com. A car loan can last up to 7 years in most cases, so it’s a long-term relationship with the lender. Therefore, what you would pay over the life of the loan is also important.
3. Put your documents in order
Proof of income, address, age, employment, etc. are necessary for the loan application process. Therefore, know what documents lenders usually need and have them ready before applying for the loan. For example, for employees, payslips and the latest income tax returns are normally required.
4. Check prepayment or seizure charges
“Usually, lenders charge a prepayment charge on auto loans offered at a fixed interest rate. Such prepayment charges can cost up to 5-6% of the outstanding loan, ”Aggarwal said. Additionally, some lenders also limit the amount and number of prepayments during the life of the loan. Therefore, if you go for fixed rate auto loans, you should prefer lenders with minimal restrictions and charging as little as possible for prepayments.
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5. Don’t overestimate your EMI accessibility
Sometimes overestimating the affordability of your Monthly Equivalent Payments (EMIs) can increase the risk of EMI defaulting due to income disruptions or other financial demands. Such defaults result in significant fees and penalties and can also negatively impact your credit score and, therefore, your future loan and credit card eligibility.
“A car loan seeker can know their EMI accessibility by deducting their mandatory monthly expenses, monthly investments for critical financial goals, insurance premiums, existing EMIs, and so on. of his monthly income. Once he knows his EMI affordability, he can go for the shorter term based on his affordability to lower his interest charges, ”Aggarwal said.
A lower down payment means that you have to convert a higher loan amount to EMI and that you will have to bear higher interest charges in the future, and vice versa. For example, if you buy a car worth ??10 lakh then by paying ??2 lakh as a deposit, ??8 lakh should be converted to EMI for seven years. In such a case, you will have to pay additional interest of ??3.15 lakh until the moment you pay off all your IMEs (assuming 10% interest rate on the car loan).
Likewise, if you would have made a higher down payment, for example ??4 lakh, then ??6 lakh should be converted to EMI for seven years. In such a case, you will have to pay additional interest of ??2.36 lakh only. Shetty said, “You need to optimize borrowing and out-of-pocket expenses so that your EMI load is not too high. or via loan interest, should be tightly controlled. “
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