NEW DELHI: Thanks to financial services provided by the banks and NBFCs, it’s easier for most working class people to purchase a vehicle. All you need to do is to make up your mind and your email inbox will be flooded with offers. Though the offer might appear attractive, one should always do some amount of homework before applying for a car loan.
“The customer should check the nature of the loan. A few banks offer a floating rate loan for car finance, when others extend fixed rate loan. The customer needs to be clear at the time of taking the loan, whether floating rate suits him more or a fixed rate loan. Secondly, customers should compare the charge applicable at the time of taking the loan,” Vyomesh Kapasi, MD, Kotak Mahindra Prime, said.
People with sound market knowledge and are opting for short-term loans are advised to take floating interest rate, as the rates are dependent on market variations. In favourable conditions, the floating interest rate is 0.5-1.5 per cent lower than the average fixed interest rate.On the charges applicable, the most important thing is to look at the processing fee, which can be anywhere between `4,000 and `6,000. At times, especially during festival/offer seasons, lenders waive off processing charges (look for those offers). However, make sure the lender is not compensating the waiver by levying any other charges.
Another important aspect before taking the final call is to compare. Car loan interest rates start from 8.7-8.9 per cent per annum onwards and many banks offer preferential car loan interest rates to their existing customers. First, a buyer should check with the bank if they are eligible for any such offers and then compare the rates offered by different banks in any online marketplace. Banks also offer a lower interest rate for female buyers, which help them save extra bucks.
Now, after getting a suitable rate, check the charges bank incur on prepayment of the loan amount. The key is to get the loan where banks charge minimum interest rate on the outstanding loan, which can be as high as four to six per cent, in case you are prepaying the loan. In the same context, it is also advised to go for shorter loan tenure and opt for a lower loan amount to reduce your interest cost.
For example, if you make a down payment of 40 per cent (`2.8 lakh) on a car of `7 lakh, your EMI for a car loan at 12.5 per cent and tenure of five years will come to `9,449/month, meaning you will be paying a total interest of `1,46,948 in the five-year period. But if you take the same plan and make only a 15 per cent down payment, your EMI will be `13,386 and the total interest payment will be `2,08,176 for the same tenure, which is substantially higher.
How much a buyer should spend on EMIs so that his other expenses would not be impacted should also be examined. “Total EMI (including all loans, such as home, personal and auto) should not be more than 35 per cent of the monthly income if it is less than `50,000. It shouldn’t be more than 50 per cent if the income is more than `50,000,” said Kapasi of Kotak Mahindra Prime.