Key Factors to Consider While Taking a Car Loan This Festive Season
Prior to proceeding with a car purchase, it is essential to consider these key factors to secure the most advantageous car loan this festive season.
Lenders typically prefer that the total EMI obligation, which includes the EMI for the new vehicle, does not exceed 50% of the borrower's monthly income. (Image: Freepik)
Acquiring new items during the festive season is regarded as a favorable practice by many individuals, prompting numerous prospective car buyers to align their purchases with this time of year. The enticing festive promotions on interest rates and processing fees offered by lenders further enhance the appeal of purchasing new vehicles during this period.
Prior to proceeding with a car purchase, however, it is essential to consider these key factors to secure the most advantageous car loan this festive season:
1. Obtain your credit report
Lenders review your credit report to evaluate your creditworthiness before granting approval for a car loan. Typically, loan interest rates are determined by your credit score. Individuals with a score of 750 or higher generally enjoy a greater likelihood of loan approval at a more favorable interest rate, whereas those with scores below 750 may face higher interest rates.
It is advisable to obtain your credit report from online lending platforms or credit bureaus before submitting your loan application. This practice will allow you to identify any discrepancies or inaccuracies in your credit report, which can then be addressed with the relevant credit bureaus or lenders. A corrected credit report will likely result in an improved credit score.
2. Evaluate interest rates
The interest rate for a car loan can range from 8.5% per annum and is influenced by several factors, including the car model, the lender, your credit score, repayment ability, and employment status. Some specialized car finance companies may provide even more competitive rates. To attract a larger segment of the festive market, numerous lenders frequently offer temporary discounts on car loan interest rates for both new and existing customers. Therefore, it is advisable to inquire with your current banks regarding any special car loan promotions they may have, and subsequently explore online financial platforms to compare the car loan rates available from other lenders.
3. Assess the LTV ratios
The Loan-to-Value (LTV) ratio of a car loan represents the percentage of the vehicle’s price that is financed by the lender, with the remainder being the down payment made by the borrower from personal funds. Since LTV ratios can differ among lenders based on their risk tolerance and the borrower’s credit profile, applicants should take these ratios into account when evaluating various loan options. Consider making a larger down payment, as this can decrease the overall interest costs. A higher down payment may also facilitate access to more favorable loan terms and lower interest rates.
However, it is crucial not to jeopardize long-term investments or emergency savings in the effort to increase the down payment. Such actions could lead to the necessity of securing more expensive loans in the future to address financial emergencies or achieve long-term financial objectives.
4. Assess Your EMI Affordability
Lenders typically prefer that the total EMI obligation, which includes the EMI for the new vehicle, does not exceed 50% of the borrower’s monthly income. Furthermore, applicants for car loans should take into account their monthly contributions towards essential financial objectives, insurance premiums, rent, and other unavoidable living expenses when determining an appropriate EMI. Individuals who have adequate surplus funds after addressing these considerations should select the shortest repayment period to minimize their overall interest expenses. Conversely, those who find their financial situation constrained should consider a longer repayment term to alleviate their EMI obligations.
5. Verify the Processing Fee
The processing fee for a car loan can reach up to 2% of the total loan amount; however, many lenders may reduce or waive this fee during festive periods. It is essential to include this fee in your comparisons of different lenders, as it can represent a significant expense for a substantial loan such as a car loan. Additionally, ascertain whether the lender compensates for the reduction or waiver of processing fees by imposing higher charges or interest rates.
6. Review Prepayment Charges
Making prepayments on a car loan, whether in full or partially, during the repayment period can significantly decrease your total interest costs. The Reserve Bank of India has prohibited lenders from imposing prepayment fees on floating rate loans, meaning that car loans with floating interest rates do not incur such charges. However, for fixed-rate car loans, prepayment fees can be as high as 5-6% of the outstanding principal. Moreover, lenders may impose limits on the number and amount of prepayments allowed throughout the loan term.
Therefore, car loan applicants who anticipate or wish to make prepayments in the future should seek lenders that offer minimal or no prepayment charges and restrictions.
