Five basic checks for choosing a car loan

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Five basic checks for choosing a car loan

Photo: BCCL

Most people tend to buy cars on credit, preferring the ease of EMI payments to pay for the vehicle. Before opting for a car loan, the buyer must know the administration fees and the interest charged by the different banks.
Generally, car loans are given for a term of up to 5 years, but some lenders such as State Bank of India and Punjab National Bank issue car loans for up to 7 years. A longer term auto loan lowers your EMI, but your overall loan cost increases due to higher interest.
The repayment term also matters. A longer repayment tenure, say 7 years, will significantly increase the interest burden and a short term loan may make EMIs unsuitable for repayment capacity. Remember that failure to pay the EMI reflects negatively on your credit report, lowering your score and limiting access to financial products in the future.

Credit report

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 collect credit reports from auto loan applicants to verify their creditworthiness.

Compare loan offers from different lenders

Lenders approve loan applications and set their interest rates primarily based on their cost of funds and loan applicants’ credit profiles. This can cause the interest rate range for the same type of loan to vary widely from lender to lender. Therefore, it is important to compare loan offers from a wide range of lenders to land the best loan deal.

EMI accessibility

Check the affordability of your EMI by deducting all mandatory monthly expenses, such as household expenses, existing EMIs, insurance premiums, and SIP contributions for crucial financial purposes from your net monthly income. Remember that most lenders prefer that your total EMIs, including the new car loan EMI, be less than 40% of your net monthly income. Once you are aware of the affordability of your EMI, prefer a shorter term as it will lower your interest charges.

Don’t ignore processing fees

Your auto loan processing fee can be up to Rs 10,000. higher interest or additional fees to compensate for the concession or waiver of processing fees.

Foreclosure or prepayment charges

Paying off your auto loan early can help lower your interest costs. However, many lenders charge auto loan prepayment fees on fixed rate loans, which can be up to 6% of your loan principal. Some lenders also cap the number and amount of prepayments allowed within a year or throughout the term. Therefore, when selecting your lender, choose the one that imposes the fewest restrictions and charges the least on prepayments.

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