If the amount you need to repay as EMI every month is a small percentage of your income, you can opt for a higher EMI and a shorter tenor
The festive season is around the corner, and during this time, most banks and financial institutions offer attractive car loan schemes such as limited-period lower interest rates, zero or waived processing fees, as well as additional discounts, freebies, and gift coupons. If you are planning to buy a car during this time due diligence is a must.
Shop Around For The Best Interest Rate
When deciding on a car loan, several key factors must be considered. “The first and foremost is the interest rate—compare rates from multiple lenders to secure the best deal. The second factor is the loan tenure. Also, determine how much down payment you can afford, as higher down payments reduce both your loan amount and interest burden.,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan distributor.
Remember, shorter tenures result in higher EMIs but save on overall interest, while longer tenures offer lower EMIs but increase interest costs. Ensure the EMI is manageable within your budget.
Most dealers have offers from multiple banks and NBFCs. Nevertheless, check if these are the best possible rates.
Loan Amount
The maximum loan amount you can avail of depends on your age and income. The disbursed amount depends on your net income and varies from one lender to another.
“Lenders typically offer 80-90 per cent of the financing, with some offering up to 100 per cent. The amount can be the 'Ex-showroom' price or the 'On-Road Vehicle' price. With car loans, it is best to keep the loans as small as possible as they are a depreciating asset. As much as possible, use a mix of savings and financing where you fall short instead of depending only on financing,” says Adhil Shetty, CEO, BankBazaar, a fintech company.
Loan Repayment Tenure
The smaller the tenor, the higher the EMI but the lower the interest you end up paying. However, remember that your EMI depends on the percentage of your net salary you spend on repaying your existing loans.
“If the amount you need to repay as EMI every month is a small percentage of your income, you can opt for a higher EMI and a shorter tenor. Else you will have to opt for a longer tenor. If you have funds for a larger down payment, then a shorter tenor is more probable,” says Shetty.
“It is impiportant to pay attention to the loan's overall cost, not just the EMI, and consider the total interest paid over time. Having a good credit score is essential for securing a favorable interest rate,” says Kapoor.
Costs Involved: Calculate your loan EMI, processing fees, and service tax and foreclosure penalties so that you have a very clear idea of the actual costs involved. You can use the online calculators to calculate the EMI. Processing charges can be in the range of 0.4- one per cent of the loan amount.
Some banks may have foreclosure charges on early loan closure, and some may charge a fee for making part payments. You need to check all these before you take a loan as these would have an impact on your total costs. “Prepayment and foreclosure charges are important because these will have a direct impact on your repayments. So make sure the terms are relevant to you. Also, during festive seasons, you may get several discounts on processing fees, which will make your loan less expensive,” says Shetty.
If there are any offers available, remember there is nothing called free lunch. Read the fine print and get a clear idea of the costs involved and how a loan will such an offer will help you save on costs.