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Banks in India offer car loans for new cars as well as used cars. Consumers who can't afford to purchase their dream car with their savings can apply for a car loan. Any salaried employee or self-employed individual with a steady income and stable occupation can apply for a car loan from the banks. An applicant with a good credit score has higher chances of car loan approval than one with a bad or low credit score. Banks consider the creditworthiness of the applicant when processing a car loan application. 750 or above is considered a good credit score.
Apply for car loan online to get better deals. Visit a third-party comparison portal to compare various car loan offers across the top banks in the country. Choose a low-interest rate car loan so as to save up on interest payments. A high interest rate means the cost of your car loan will also be high. These days, with different lending institutions (banks and non-financial banking companies) adopting new financial technologies and modern methods of providing easy access to credit, it is not that difficult to get funding to purchase your dream car.
Equated Monthly Instalments: Though obtaining car loan to purchase your dream car is easy, there are certain things to keep in mind when applying for a car loan. One of the important factors being loan repayment. Car loan is paid through Equated Monthly Instalments (EMI). That is why, it is necessary to plan your loan repayment schedule before applying for a car loan.
Car Loan EMI calculator: Visit the bank website or a third-party comparison website to get your car loan payment schedule. Use the Car Loan EMI calculator available online to get instant and accurate results. All you have to do is enter your chosen car loan amount, loan tenure, interest rate, and processing fee into the tool. Click on 'Calculate' and get your monthly EMI, interest payments, and the outstanding balance after each EMI payment in the form of an amortisation table.
Low debt-to-income ratio: Ensure your car loan EMI doesn’t exceed more than 50% of your salary. It is advisable to maintain a low debt-to-income ratio as a high debt-to-income ratio means there is a higher chance of defaulting on your car loan.
Prepayment in car loan
If you come into sudden inflow of cash, you can make partial or full prepayment of your car loan before the end of its tenure. Banks charge a prepayment fee for prepaying the car loan before its tenure. The prepayment fee is a small percentage of the outstanding principal amount of the car loan. Go through the prepayment clause at the time of applying for a car loan from a bank. Pre-closing a car loan before the end of the tenure can negatively affect your credit score.
Usually, a borrower decides to prepay or pre-close a car loan because he or she has come into a sudden inflow of cash and don't want to pay EMIs anymore. Pre-closing your car loan can help you save up on interest. Although, the borrower is willing to preclose the car loan, the bank may not allow it. That is why, banks charge penalty fees for pre-closing car loans.
Prepayment is when a borrower prepays a part of the car loan in advance whereas preclosure/foreclosure is when whole of the car loan is paid before the end of the loan tenure. Prepayment charges and foreclosure charges differ from bank to bank. Therefore, before applying for a car loan from a bank, go through the terms and conditions set by the bank with regards to prepayment and foreclosure.
There are certain valid reasons why pre-closing/foreclosing a car loan may not be a good idea:
When a borrower fails to make EMI payments repeatedly, it is considered as car loan default. The terms and conditions of car loan default varies from bank to bank. It is advisable to negotiate with the bank when you suspect that an EMI payment can't be made on time rather than avoiding the lender. Give valid reasons for not being able to make your car loan EMI payments. The bank may agree to extend your car loan tenure or the due date of the EMI payment. Usually, late payment charges are levied on late EMI payments, so request the bank to waive the late payment fee. The bank will send you a written notice of default for not meeting the loan repayment obligations. If the notice is not honored, the bank will repossess your car.
A repossessed car will be sold off through auction by the bank to compensate for your outstanding loan balance. The bank will advertise the auction details of the repossessed car so that if you decide to bid for your car, you can do so at the auction. One of the repercussions of defaulting on your car loan is that it will negatively affect your credit score. As the car loan default will be mentioned in your credit report, you may not be able to obtain any type of loan for the next 7 years. Also, if the car is auctioned off at a lower price than the actual outstanding loan balance, then you will have to pay the difference. However, if the car is auctioned off at a higher price, the surplus amount may be reimbursed to you by the bank.