Car Loan: To buy a new car on this Diwali, then keep these things in mind before taking a car loan

Car Loan: It is considered auspicious to make new purchases during the festive season in India. Many people wait for the festive season throughout the year for shopping. Most of the banks also announce various festive offers to woo their customers during the festive season. Under this festive offer, banks provide cheap loans to their customers and apart from this they also give many discounts including processing fees. This is also one of the reasons why Indians wait for the festive season to make new purchases. If you too want to buy a new car this festive season, then this can prove to be a great opportunity for you. Here we have explained what are the things to keep in mind while buying a car loan during the festive season.

1. Get your credit report before submitting the loan application.

Before approving the car loan application, banks check your credit report to assess your creditworthiness. Most of the banks fix the loan interest rates on the basis of your credit score. If your credit score is 750 or more, then there is an increased chance that you will get a loan at a lower interest rate. On the contrary, if your credit score is not good or less than 750 then it may be a bit difficult for you to get cheap loan. Before submitting your loan application, get your credit report from the online lending marketplace or credit bureaus. By doing this you can identify any discrepancies or incorrect transactions on your credit report. In this way, you can take necessary steps to improve your credit score.

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2. Comparison of interest rates of different banks

Your loan interest rate is decided based on many factors including car model, lender, credit score, repayment capacity and job profile. Many car finance companies may offer low interest rates. In order to attract more customers in the festive market, many lenders offer special discounts on car loan interest rates for a limited period to new and/or existing customers. Hence, you must check the specific car loan offers of banks properly. Apart from this, you can compare car loan rates offered by lenders in online financial marketplaces.

3. Compare LTV Ratio.

The LTV ratio of the car loan is the ratio of the cost of the car financed by the lender. The remaining amount has to be paid by the borrower himself as down payment. The LTV ratio of a car loan may vary from bank to bank depending on the borrower’s risk appetite and credit profile. The LTV ratio should also be considered while comparing different loan offers for car loans. You should try to pay a higher amount as a down payment while taking a car loan as it lowers your interest cost. Moreover, making a higher down payment can also help in getting a better deal and loan at a lower interest rate. However, you should never use your emergency fund to make a higher down payment. Doing so may force you to take a costly loan later to meet a financial emergency or long-term financial goals.

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4. Income EMI should not exceed 50%

Most lenders require that the monthly installment of your car loan should not exceed 50 per cent of your monthly income. Apart from this, car loan applicants should also keep in mind their essential expenses of the month like financial goals, insurance premium and rent while opting for EMI. After all this, if you have sufficient balance, then you should opt for the lowest repayment tenure to reduce your overall interest cost. But if you feel that you do not have enough money, then you should opt for a longer tenure to reduce your EMI burden.

5. Comparing Processing Fees Is Also Important

While car loan processing charges can generally go up to 2% of the loan amount, many lenders either reduce or waive off their car loan processing charges during the festive season. So you should also compare their processing charges while comparing banks. Car loan requires a huge amount. In such a situation, 2 percent processing fee can also be high for you. Apart from this, it should also be checked whether the lender is charging any higher fee or interest rate to compensate for the reduction or exemption in processing fee.

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6. Check Pre-payment Charges

You can reduce your loan tenure or monthly installment amount by prepayment during the car loan repayment tenure. RBI has asked lenders to waive off the penalty on pre-closure or advance closure of floating rate loans. Car loans with floating rate of interest do not attract any prepayment charges. However, in case of fixed rate car loans, the prepayment charges can range from 5-6% of the principal outstanding.