Most people tend to buy cars on loans, preferring the ease of EMI payments to pay for the vehicle. Before opting for a car loan, the buyer must know the processing fee and interest charged by various banks.
Typically, car loans are issued for a tenure of up to 5 years but some lenders such as the State Bank of India and Punjab National Bank issue car loans for up to 7 years. A longer-term car loan although reduces your EMI your overall cost of the loan goes up due to higher interest.
The tenure of repayment also matters. Longer repayment tenure of say 7 years will increase the interest burden significantly and a loan of short duration may make EMIs unsuitable with repayment capacity. Remember non-payment of EMI reflects negatively on your credit report, lowering your score and limiting access to financial products in future.
Credit report
Interest rates on loans are decided by parameters such as the source of income, gender, and credit score. If you have a high income but a poor credit score, your loan rate may still be high. Lenders fetch the credit reports of car loan applicants to check their creditworthiness.
Compare loan offers from different lenders
Lenders approve loan applications and set their interest rates primarily on the basis of their cost of funds and credit profiles of loan applicants. This may lead to the interest rate range for the same loan type varying widely across the lenders. Hence, it is important to compare the loan offers from a wide spectrum of lenders to land the best loan offer.
EMI affordability
Check your EMI affordability by deducting all mandatory monthly expenses, such as household expenses, existing EMIs, insurance premiums and SIP contributions for crucial financial goals from your net monthly income. Remember that most lenders prefer your total EMIs, including the new car loan EMI, to be within 40% of your net monthly income. Once you are aware of your EMI affordability, prefer a shorter tenure as that will reduce your interest cost.
Do not ignore the processing fee
The processing fee of your car loan can go up to Rs 10,000. While many lenders reduce or waive off their processing fees during festive seasons, make sure that you are not being charged higher interest rate or any additional charges to make up for the concession or waiver of the processing fee.
Foreclosure or pre-payment charges
Making prepayment of your car loan can help in reducing your interest cost. However, many lenders levy prepayment charges on car loans lent on fixed-rate loans, which can go up to 6% of your outstanding loan principal. Some lenders also cap the number and amount of prepayments allowed within a year or during the entire tenure. Therefore, while selecting your lender, choose the one that imposes least restrictions and charges the least on making prepayments.
