Amid the crippling slowdown in the demand for cars, vehicle makers are leaving no stone unturned to make the most of this festive season. They have announced numerous schemes such as free insurance, cash discounts and extended warranty while some lenders have announced a waiver on the car loan's processing fee and concession of a few basis points on the interest rate.
Keep in mind the following points if you wish to avail a good deal on car loans this festive season:
1. Check your credit score to avoid car loan rejection
Before approving a loan application, lenders evaluate credit history to check your credit worthiness. Many lenders fix loan rates on the basis of your credit score. Generally, those with credit score of 750 and above are preferred by lenders while the ones with lower score may have to settle for the loan at higher interest rates.
Before submitting the car loan application, fetch your credit report from the credit bureau or online lending marketplaces. This would help detect any discrepancy or fraudulent transactions, which once rectified can improve your credit score, thereby increasing the chance of loan approval.
2. Compare lenders on various parameters
Before you zero in on any lender, be sure of not restricting your comparison to just interest rate. Instead, you should compare loan options on other crucial parameters such as processing fee, loan tenure, prepayment charges, LTV ratio etc. During the festive season, most lenders try and attract the potential car loan borrowers by extending deals and discounts such as zero processing fee, 100% financing and quicker loan disbursal. Under such scenario, it is necessary for borrowers to act with due diligence and opt for one that comes with least charges and limitations.
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3. Accumulate sufficient down payment
Lenders usually offer up to 85 – 90% LTV ratio on car loans, implying that borrowers would have to fund remaining 10 to 15% of the vehicle's cost out of their own pockets. While some lenders provide up to 100% funding on the vehicle's on road price, it is recommended for borrowers to still finance some portion of the cost themselves. The higher the down payment, the lesser you would require to borrow and repay, along with the car loan's interest rate, which generally range anywhere between 8.6% and 14% p.a.
4. Check your EMI affordability
Your loan amount, tenure, and interest rates are vital factors that lenders take into consideration while deciding your loan EMI. EMI affordability can be obtained by deducting your mandatory monthly expenses like insurance premiums, SIP contributions, existing EMIs etc from your net monthly income. Lenders usually prefer loan EMIs to be within 40% of your monthly income. While higher loan EMI translates to lower interest cost, avoid opting for it at the cost of long term investments and emergency fund. Go for a shorter loan tenure to save the interest cost only if you can afford to repay your car loan EMI without compromising on your monthly investments, savings and expenses.
(By Sahil Arora, Director & Group Head-Investments, Paisabazaar.com)