Things You Should Know Before Getting a Car Loan

Things You Should Know Before Getting a Car Loan

Things You Should Know Before Getting a Car Loan - Getting a Car Loan ChecklistBuying a new car with cash down is not a common man’s reality and that is where car loans come into the picture. If we have the minimum amount required for a down payment we can start thinking of investing on the four wheeled dream we all want to own. It is exciting to zoom off in your own car but there are a few things to keep in mind while opting for a car loan.

If you are not well versed with your financial jargons and have not read the fine print before putting down your signature, you might have a tough time with the re-payment. It is important to understand what suits your need first; and then do a thorough market research to find the best car loan for you.

Preparing yourself for all the extra costs while purchasing a car will help you to make an educated decision without lighting your pockets too much. Here are some of the important things to consider when going for a car loan.

Getting the best bargain

When deciding a loan, you will need to do some scouting to find out which bank or dealer is offering the best bargain. Usually, the car dealers will have tie-ups with banks and will try to lure you into financing from them, but it is better to check with the other banks first and if you get a better interest rate or deal you should opt for a separate financing.

You will have to draw a comparative chart of your own and do a analysis based on tenure, amount, rate of interest, installment amounts and if any other surcharges. If you don’t look into these factors, you will be taken for a ride, where the agent will get a good commission and you will end up paying a hefty interest rate.

Down payment

In India, car loans are usually given for up to 80-90% of the on-road price of the car (which includes total value of the car, local taxes, and car insurance). So, before going for a car, you should have at least 20% of the on road price plus some extra amount for the accessories and other formalities. The more cash down payment you pay, the less interest you have to bear in the loan amount.

So it is always better to save some cash for about six months and then invest on the car. This way, you don’t end up using any investments or other crucial savings for the down payment. Then again, if you are willing to bear the pinch of the larger interest and unwilling to shell out too much cash for the car, you might want to work out a deal with the dealership and get your loan amount increased. Although, banks will usually not furnish the 100% amount, you can still try getting a better deal.

Processing charges and agent commission

All loans have a certain percentage fixed as a processing fee and also most dealers have a bargain with the banks that provide a certain commission on securing a loan. Although, these amounts are not very huge when compared to your car value, but they are still significant amounts which can provide you some relief when waived off.

You can probably work out a deal with the bank to get the processing fee waived off or reduced. With regards to the commission of the agent, unfortunately it is unavoidable, but can be significantly reduced when you make a deal on your own instead of going through your dealer. Making these small bargains can go a long way in securing you a loan with a little less financial impact.

Tenure versus premium

In a loan, the tenure of payment will usually be inversely proportional to the premium amount. That is, the longer the tenure of re-payment, the lesser will be the premium amount. You should carefully consider the amount which is comfortable for you to pay every month before going for the loan. It should not end up cutting into your expenses so much so that you need to give up the car at the end.

However the longer the duration, the larger is the rate of interest that you end up paying. However, you have the option of pre-paying your loan in the future when you have better finances provided there is little or no pre-payment penalty from your bank. So, at the end it should be a perfect balance of both and to get that balance, you will need to calculate the total interest that you will be paying at the end and also how much amount you are able to manage without pinching your budget too much.

Pre-payment penalty

People usually don’t want to keep their car for more than 3-4 years, especially if you are getting a good bargain. So in case you have opted for a loan which has a longer tenure, you should also look at the pre-payment penalty that applies to your loan. Some banks don’t have a pre-payment penalty after certain duration of the tenure has expired while some might have a low pre-payment charge.

There are other banks which levy heavy pre-payment charges which becomes almost close to the amount of interest which you would have otherwise saved by pre-closing the loan. You should pay close attention to the pre-closure charges as well before signing on the deal. This is one point which is usually hidden in the fine print and unless specifically asked, you might not be volunteered the details.

If you are on the verge of splurging on a car, you should give some thought to the fact that your car is going to be a depreciating asset. Hence, you should only go for it if you can afford to take a loan and re-pay it comfortably without limiting your finances too much. You should also consider the above points and do proper home-work, when choosing the loan which best suit your needs. Having said that, enjoy the drive!

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