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As the automakers increase the price of new and old car models this year in an effort to make up for the rise in production costs, more consumers are turning to banks for auto finance. Banks and Non-Banking Financial Companies (NBFCs) offer new and used car loans at competitive interest rates for a loan tenure ranging from 1 to 7 years.
The loan is repaid to the bank by the borrower in Equated Monthly Installments (EMI) over a specified loan tenure. At the time of car loan approval, the borrower has to sign a loan agreement to that effect. Although car loans are easy to obtain as long as the applicant meets the car loan eligibility criteria, the borrower has to make it a point to read the terms and conditions of the loan agreement carefully before signing it.
No matter what type of loan you choose - personal loan, car loan or home loan, there are several clauses in the loan agreement which are put in place to protect the interests of both the lender and the borrower. The car loan surrender letter is one such clause that is put in place by the legal team of the lending institution in order to safeguard the interests of the lender (bank). That is why, as a borrower, it is wise to familiarise yourself with any loan agreement clause that you are agreeing to and understand the implications of the clause before signing the document.
Although most borrowers are familiar with the car loan surrender letter, they may not have fully comprehended the importance of the clause. A car loan is a secured loan where your car acts as collateral. If you default on your car loan, the bank will repossess your car and put it up for auction to compensate for the outstanding dues. This process is known as foreclosure.
You may wonder as to why the bank requires you to sign the surrender letter beforehand. As a car is a movable property, there have been many instances where a borrower who defaults on a car loan has gotten rid of the car by illegally selling it and pulling a disappearing act on the bank. In an effort to prevent such a hassle, the banks ask the borrowers to sign the car loan surrender letter at the time of loan approval. Getting the borrower to agree to the clause beforehand helps the bank safeguard its interest wherein it can repossess the car rightfully (as per a court order) in the case of a defaulted car loan.
Banks don't repossess the car in the first instance of a missed EMI payment. Rather, the borrower will receive sufficient notice from the bank regarding the outstanding dues. Only when the borrower has failed to heed the notice does the bank initiate the process of car loan foreclosure. A borrower who makes timely EMI payments doesn't have to worry about the clause. However, the unscrupulous ones who indulge in malpractices will have to face the implications of the clause involving the car loan surrender letter.
Some banks may charge a foreclosure fee. Banks advertise the auction details of the car in print. The borrower can choose to bid for the car at the auction if he or she can drum up sufficient funds to get the car back. The car will be sold to the highest bidder to recoup the debt that the borrower owes to the bank.
When a bank forecloses a car loan, the credit score and credit history of the borrower is negatively affected. A voluntary surrender of the car may sound like a better idea. Whether you surrender your car voluntarily or the bank repossesses your car, it implies the same thing - your inability to repay the car loan as per the agreed upon terms. However, voluntary surrender of the car to the bank will show the future lenders who take a look at your credit report that you took responsibility for the debt you owed. A bad credit report shows the borrower’s poor credit management skills which can lead to dismal future loan prospects. Take steps to improve your credit score and credit history so as to increase your chances of loan approval.
Maintaining a low debt-to-income ratio will ensure that the borrower does not default on his or her car loan repayment. When choosing the loan amount, keep in mind, your car loan EMI payments must not exceed more than 50% of your income. Make a higher down payment on the car of your choice in order to lower the total cost of your car loan. Choosing a suitable loan tenure will also help you keep a check on the total cost of your car loan. A short loan tenure means higher EMI payments but lower interest payments whereas a long loan tenure means lower EMI payments and higher interest payments.
To find out how much your car loan will cost you on a monthly basis, use the free online car loan EMI calculator. You will get instant and accurate results of your car loan EMI calculation. The tool is simple and easy to use. Enter the car loan amount, loan tenure, interest rate, and processing fee in the tool and click on the ‘calculate’ button. You will get an amortisation table which represents the periodic car loan repayment schedule. The table consists of car loan EMI payments, overall interest payments, and the outstanding dues after each EMI payment. As per the results, you can choose an appropriate loan amount and loan tenure so as to keep the cost of your car loan to a minimum.
Borrow how much you can afford to repay. To avoid the rejection of your car loan application, check your car loan eligibility online. Multiple loan rejections can have a negative impact on your credit score. Banks check the repayment capacity of the applicant when processing a car loan application. Having a credit score of 750 or above indicates that the applicant is creditworthy. Likewise, having a minimum annual income of Rs.2 lakh and holding down a stable job, indicates the applicant’s capacity to repay the car loan on time. Do sufficient research when applying for a car loan. Visit a reliable third-party website to compare various car loan offers and choose one with a low-interest rate and flexible repayment options.