• Types of Car Loans

    A car loan is nothing but the funds that one borrows from a lender for the sole purpose of purchasing a car of his or her choice. Lenders like banks and Non-Banking Financial Companies (NBFCs) offer auto finance to consumers in the form of new and used car loans. From luxury sedans to hatchbacks, car loans are available for almost all passenger vehicles and commercial vehicles in the market. A car loan is repaid with interest through Equated Monthly Installments (EMIs) over a specified period of time called the loan tenure.

    There are 3 types of car loans available in India:

    • New Car Loan: As the name suggests, a new car loan can be used to purchase a brand new car straight out of the showroom. Banks offer new car loans at an interest rate of 9-14% p.a. for a loan tenure of 1 to 7 years. New car loans are available for most makes and models of cars in the market.
    • Used Car Loan: Banks and NBFCs offer used car loans up to 80-85% of the price of the car at an interest rate of 12-18% p.a. for a loan tenure ranging from 1 to 5 years. Used car loans can be used to purchase pre-owned or used cars that are less than 5 years old or doesn’t exceed more than 10 years at the time of loan maturity.
    • Loan against Car: When one is in dire need of funds, he or she can pledge his or her old car as collateral in order to obtain sufficient funds to purchase a new car. This is known as Loan against Car. Some banks in India offer loan against car up to Rs.10 lakh or 100% of the value of the car at an interest rate of 14-15% p.a. for a loan tenure of 1 to 3 years. For instance, if you have a bad credit score, you can pledge your old car to the bank as collateral to obtain some much-needed funds.

    Car Loan Application

    Applying for a car loan is easy, especially when done online through the bank website or a reliable third-party website. The applicant has to submit income proof (the latest bank statements, last 3 months’ payslips, and IT returns), age proof (birth certificate and 10th or 12th school certificate), identity proof (PAN, Passport, Aadhaar card, Voter’s ID or Driving Licence) and address proof (ration card/utility bills like telephone or electricity bill) along with a duly-filled and signed car loan application form to the bank. The bank will verify the details furnished by the applicant and process the loan application. Upon approval, the car loan amount will be transferred to the applicant’s bank account immediately.

    Why do we feel the need to own a car?

    Is it because cars are a convenient mode of transportation that can take you from place A to place B in a short period of time when compared to say, walking or taking public transport? Whether you are commuting to office or dropping off your kids at school, a car of your own can come in handy for traveling short and long distances. There are people who love to go on cross-country road trips using their own car rather than rent one and worry about the cost of damage to a rental car. What’s more, owning a car is considered to be a status symbol, especially in the case of car enthusiasts who want to own either the fastest car or the most luxurious car in the market.

    How to afford a car of your choice?

    Now that we have established valid reasons for the need to own a car, let’s focus on how a person can afford a car of his or her choice. If you are fortunate, you may receive a car as a graduation or wedding gift from your family. You also have the option to use your savings to purchase a car. However, breaking a long-term savings scheme like Fixed Deposit to purchase a car is not a smart financial decision. So, you are left with one other option and that is car loan. Banks and Non-Banking Financial Companies (NBFCs) in India offer car loans at competitive interest rates for a flexible loan tenure of 1 to 7 years.

    Who is eligible for a car loan?

    Any individual aged 21 to 65 years with a good credit score and a steady income can apply for a car loan. Whether you are a salaried individual or a self-employed person, the minimum annual income requirement of an applicant is Rs.2 lakh. The applicant should have at the least 2 years of work experience in the same profession. In other words, the individual must hold down a job in the same field for minimum 2 years. Banks look at the applicant’s credit history at the time of processing a car loan application as it shows the person’s credit management skills. Having a credit score of 750 or above will make you eligible for a car loan. A good credit score indicates your creditworthiness. Depending on whether you meet the car loan eligibility criteria set by the bank, your car loan will be approved or denied. Before applying for a car loan, check your car loan eligibility online so as to avoid rejection. Too many rejections will have a negative impact on your credit score.

    What are the features of a car loan?

    Understanding how a car loan works can help you choose a suitable car loan offer. Here are the important features of a car loan:

    • Car loan amount: Banks offer a maximum car loan of up to 85-100% of the on-road price/ex-showroom price of the car. If you pay a high down-payment on your chosen car, then the cost of your car loan will be less.
    • Car loan tenure: You can opt for a short or long car loan tenure ranging from 1 to 7 years. A short loan tenure will ensure you repay your loan in a short period of time but will have high EMIs whereas a long tenure will have low EMIs but you will end up paying more in interest payments. It is advisable to use an online car loan EMI calculator tool to choose a suitable car loan tenure so that you can save up on interest payments.
    • Car loan interest rate: In order to repay your car loan, you have to pay interest on the principal loan amount every month over the chosen loan tenure. The interest rate of a car loan will vary depending on the bank you choose. Visit a third-party website to compare various car loan offers across the top banks and choose one that offers the lowest interest rate.
    • Car loan EMI: Car loan is repaid to the bank in Equated Monthly Installments (EMIs). In order to get instant and accurate results of EMI calculation, use the online car loan EMI calculator that is available for free on the bank website or a reliable third-party website. The tool is easy to use - all you have to do is enter the loan amount, interest rate, loan tenure, and processing fee into the calculator and click on the ‘Calculate’ button. You will get a periodical loan repayment schedule in the form of an amortisation table. The table will consist of your EMIs, outstanding due after each EMI payment, interest payments, etc. EMI calculation can help you find out how much your car loan will cost you monthly.
    • Processing fee: Banks charge a small percentage of the principal loan amount called the processing fee to process your car loan. The processing fee will be deducted at the time of disbursing the loan amount to your bank account. Some banks waiver the processing fee as a special offer.
    • Prepayment/Preclosure: Banks allow borrowers to prepay a part of the car loan after 12 EMI payments have been made. For making this prepayment, you will have to pay a penalty fee which is a percentage of the prepayment amount called the prepayment fee. You can also choose to pay the loan amount in full before the end of its loan tenure called preclosure. Banks charge a preclosure fee which is a percentage of the remaining principal amount that you pay to preclose the loan. Pre-closing a car loan is not advisable as making timely EMI payments can help to improve your credit score.
    • Foreclosure: As the car acts as a collateral in car loan, if you were to default on your car loan, your car will be repossessed by the bank and put up for auction to compensate for the outstanding dues. This procedure is called car loan foreclosure.
    • Types of car loans: Banks offer 3 types of car loans - new car loan, used car loan, and loan against car. As the names suggest, new car loans can be used to purchase a new car whereas a used car loan can be used to purchase a used or pre-owned car. Loan against car is wherein you can pledge your old car in order to obtain loan from the bank to purchase a new or second-hand car.

    New Car Loan Vs Used Car Loan

    New car loan and used car loan differs not only in purpose of the loan but also in interest rates and loan tenure. Obviously, the cost of a new car is higher than the cost of a second-hand car. However, does the same apply to the cost of new and used car loans? Listed below are the differences between new and used car loans:

    • Loan amount: As the price of a new car is higher than the price of a used car, the loan amount of a new car loan is higher than used car loan. Banks offer new loans up to 85-100% of the ex-showroom or on-road price of a new car. Banks offer used car loans only up to 70-80% of the price of a used car.
    • Interest rate: As the loan amount for a used car is lesser than a new car, the interest rate for a used car loan is higher than a new car loan by 5-7%. Furthermore, lenders believe that providing a new car loan is less risky as a new car has better resale value than a used car.
    • Loan tenure: The loan tenure for new car loans range from 1 to 7 years whereas for used car loans, it is 3 to 5 years. Thus, the loan tenure for a new car loan is longer than a used car loan. Car loan tenure is determined based on the age of the car and the loan amount.
    • Loan EMI payments: EMI payments are smaller for new car loans as they have longer repayment periods when compared to used car loans. The EMI for a used car loan is higher than a new car loan as the loan tenure for a used car loan is comparatively smaller.
    • Down payment: The down payment for a used car is higher than a new car as lenders are willing to lend a maximum loan amount of only half the price of a used car.

    The insurance cost of a used car is higher than a new car depending on 2 factors - maintenance cost and safety features. The maintenance cost of a used car is higher than a new car and the safety features available on a new car is more compared to a used car. Therefore, the insurance premium is higher for a used car compared to a new car. Similarly, the depreciation of a new car is rapid when compared to used cars. The depreciation rate of a used car is comparatively lower.

    Car loans offer a respite to consumers who want to purchase a car of their choice but don’t have sufficient funds to do so. When choosing a car loan offer, pick one with the lowest interest rate, a suitable loan tenure, zero processing fee, and flexible repayment options. Car loans are available for the purchase of most makes and models of cars in the passenger and commercial vehicle segments, ranging from hatchbacks and sedans to Sports Utility Vehicles (SUVs) and Multi Utility Vehicles (MUVs). You can also get tax deductions on car loans for commercial vehicles.

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