How Car Loans Work in India?

The entire process of applying for a car loan has been simplified by the banks for the ease of the borrowers. These days right from applying till loan approval and disbursal everything can be done online without any personal visits to the banks. The entire process of the application works in the following way:

1. Application form - In the very first step, the applicants need to fill in an application form for their desired bank with all the vital particulars such as their personal details and other required credentials.
2. Document verification- After the submission of the application, the borrowers are required to upload all the documents mandated by the banks. Since the car is the guarantee in case of a car loan, documents regarding that need to be provided.
3. Loan approval- If the bank finds all the documents valid and finds the borrower to be capable of paying the loan EMIs on time, they will approve the loan amount within a short duration of 2 days.
4. Loan disbursal- The loan amount is disbursed to the applicant after a certain time. In other words, the banks provide a certain percentage of the amount that the buyer has invested in buying his/her car.

Types of Car Loans Offered

1. Loan for a new car- As the name suggests, a new car loan is a finance that banks provide to the buyers for the purchase of a new car. Usually, banks provide up to 85% of the total value of the car under this type of car finance. In such types of loans, the buyer can avail the loan amount either before or after purchasing the car, however it is up to the bank's discretion. The car is hypothecated as security and the user needs to pay the EMIs regularly to pay off the loan amount within specified loan tenure. The banks can repossess the car in case of EMI defaults.
2. Loan for a used car- A used car or a pre-owned car as it is called is a car as it is already used by one or multiple users for a certain time period. Banks or finance agencies offer loan for such pre-owned cars which are not old more than 3 years. Since cars are depreciating assets and tend to lose their value with every passing year the loan amount for such cars are comparatively low than the loan amount offered for a new car. Banks offer minimum 50% to 80% of the existing market value of the car. In certain cases, banks offer up to 90% of the car value.
3. Loan against a car- This is a special type of car loan where the banks provide a loan to the borrowers against their car to meet their financial requirements. Borrowers who are in need of money benefit from this type of car loan. A customer can avail up to 50-80% of the existing value of the car under this loan. The car is taken as the security in this case and is released after the borrower repays the loan amount within time.

Factors of Car Loan Approval in India

Applicant's CIBIL score- The CIBIL score plays a vital role when it comes to car loan approval in India. CIBIL score is the rating given to an individual customer by the Bureau of CIBIL based on his/her past loan repayment record. If the borrower is found to be consistent in paying the loan EMIs on time, the person is given a high rating. On the contrary, borrowers who were not regular with their EMI payments are offered a low credit score.

Car loan repayment period- Usually in India the car loan repayment period ranges between 1-7 years. It is up to the comfort of the borrower what repayment tenure he/she wants to pick. The repayment tenure has a significant role to play in deciding the monthly EMIs. If the tenure is higher, the EMIs are low and if the tenure is shorter, the EMIs are naturally more. However, it is preferable that the buyers fix a shorter repayment tenure as they will otherwise have to pay more as interest.

Age of the car- The age of the vehicle is a very important aspect which the lenders consider while offering a car loan in India. The age of the car is very important to determine the value of the car. Usually, in India, the value of a car starts depreciating the moment it is driven out of the showroom at least by 10%. After that, with every passing year, the value keeps on decreasing. Banks or lenders provide used car loans for pre-owned cars which are not more than 3 years old. This way they ensure that in case of loan defaults they will be able to collect the invested money by repossessing the value without ending into a loss.

Car Loan Interest Rates

The interest rate is the most vital decisive factor of a car loan. In other words, the interest rate is the sale bait which is used by the banks and finance agencies to sell their loan products.

In this regard, it can safely say that that the car loans at present work in India based on promotion and the level of competition is very intense and high. For example, if one bank offers car loans starting from 8.99% p.a. other banks challenge it by offering loans at 8.50% p.a. or even less.

On an average, the top leading banks and other financial agencies in India are offering car loans at an interest rate ranging from 10% p.a. to 13% p.a. However, the interest rate is not same for all the borrowers, and it varies from case to case. Depending on the borrower's profile, applied loan amount, repayment tenure and certain other factors a final interest rate is offered by the banks to the borrowers.

The interest rates offered by the banks are negotiable in certain cases. Borrowers can bring down the rate based on their eligibility factors.

Hence, a buyer should shop around and discuss with at least 3-4 banks to get the best loan rate. Before starting the discussion, do your research on the car loan interest rate trends and other facts to have an upper hand in the discussion.

Though, the car loan interest rates have started dipping as car manufacturers these days are providing subsidised car loans at lower interest rates, be wise and try all means to get hold of the best offer that the car loan market in India has in store.

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