Making new purchases during the festive season is considered auspicious by most of us, and many potential car buyers time their car purchases around this period. The special festive offers on interest rates and processing fees by the lenders during the festive season only increase the attractiveness of buying new cars at this time.
Before you go on about purchasing one, here are 6 major factors that you should consider to avail the optimum car loan this festive season:
1. Fetch your credit report before submitting loan application
Lenders examine your credit report to assess your creditworthiness before approving the car loan application. Most lenders fix loan interest rates based on your credit score. Those with a score of 750 and above generally have increased chances of loan approval at a lower rate of interest while those with below 750 points might avail a loan at a comparatively higher rate of interest.
Ensure to fetch your credit report from online lending marketplaces or credit bureau before you submit your loan application. Doing so would help identify discrepancies or erroneous transactions, if any, in your credit report and report them to credit bureaus or lenders. A rectified credit report will automatically lead to a higher credit score.
2. Compare interest rates across lenders
Based on factors like car model, lender, your credit score, repayment capacity, job profile and others, your car loan interest rate can be anywhere from 7.10% p.a. onwards. Many captive car finance companies might offer even lower loan rates. To garner a bigger share of the festive market, many lenders also offer special discounts on car loan interest rates for a limited period to the new and/or existing customers.
Hence, make sure to check with your existing banks for special car loan offers, if any, and then consider visiting online financial marketplaces to compare the car loan rates offered by other lenders.
3. Compare the LTV ratios
LTV ratio of a car loan is the proportion of the price of the car financed by the lender. The rest is the margin or down payment amount paid by the borrower from his own fund sources. As the car loan LTV ratios can vary across the lenders depending on their risk appetite and the credit profile of the borrowers, car loan applicants should also consider LTV ratios while comparing various loan offers.
Try making higher down payments as it will reduce their interest cost. Making higher down payment might also help in availing better deals and lower interest rate on loans. However, they should never compromise their long term investments or emergency fund in the pursuit of making bigger down payment. Doing so may force them to avail costlier loans later on to meet their financial emergencies or long-term financial goals.
4. Check your EMI affordability
Most lenders prefer total EMI obligation including the EMI of the new car to be lower than 50% of the loan applicants’ monthly income. Additionally, car loan applicants should also consider their monthly contribution for their crucial financial goals, insurance premiums, rent and other unavoidable lifestyle expenses while opting for an EMI. Those who have sufficient surpluses after meeting these parameters should opt for the shortest repayment tenure to reduce their overall interest cost. Those who find their finances stretched should instead opt for a longer tenure to reduce their EMI burden.
5. Ensure to check processing fee
While a car loan’s processing charge can go up to 2% of the loan amount, many lenders either reduce or waive off their car loan’s processing fee during the festive season. Thus, ensure you factor in this fee while comparing lenders as it can cost a substantial amount for a big ticket loan like a car loan. Also, check whether the lender is charging any higher charges or interest rates to compensate the reduction or waiver in their processing fees.
6. Check the prepayment charges
Car loan prepayment, whether in full or in part, during the repayment tenure can help in reducing your overall interest cost. As the RBI has prohibited lenders from charging prepayment fee on floating rate loans, car loans at floating rate of interest do not come with any prepayment charge. However, in case of fixed rate car loans, prepayment charges can be as high as 5-6% of the principal outstanding.
Moreover, lenders may also cap the number and amount of prepayments permitted in the course of the entire loan tenure. Thus, car applicants planning or capable to prepay their car loans in future should prefer a lender with least or nil prepayment charges and limitations.
