There was a time when buying a car was a luxury. Only those who could shell out large amounts of money could buy their dream car. With emerging car loan lenders, owning a car today is no longer a luxury, but very possible for the Indian middle class.
Benefits of car loans
Purchasing a car or a house is a big financial decision for any person. Most people usually take a loan to finance these. The car loan interest rates now are the lowest in decades. Also, the special festive offers on interest rates, reduced processing fees, and other car loan schemes by the lenders during the festive season makes buying new cars at this time, an attractive proposition. India’s largest public sector bank, State Bank of India, has reduced interest rates on car loans, to a new low of 7.5%. from an earlier 7.75%.
According to RBI, India’s total motor vehicle loan amount was Rs 2.19 lakh crore at the end of August 2020. This accounts for 8% of total personal loans and the annual growth in the past five years was 10.8%.
Car Loan Tips
Purchasing a car of your own requires careful effort and planning. A car loan is the best financial instrument to buy a car. It enables you to purchase a car of your choice, which you can pay back in easy monthly instalments. You have to do proper planning before deciding on a car loan, keeping in mind that depreciable assets, such as a car, lose their value over time. Accordingly, you must choose the right EMI, and the total time for repayment.
Plan a budget
Frame a budget for the upcoming expenses after you buy the car, such as fuel, insurance, and regular maintenance costs. Also, ensure that your EMI should not be more than 15% of your monthly net income.
Most lenders offer car loans for a tenure of 7 to 8 years. However, you should opt for a shorter tenure, after taking the Equated Monthly Instalments (EMI)s into consideration. The EMI amount is higher when the tenure is shorter and also brings down the interest cost substantially. So, you can pay back your loan sooner. We will explain this by using the table below:
| Loan Amount | Tenure | Interest Rate | Interest Amount | EMI |
|---|---|---|---|---|
| Rs 8 lakhs | 4 year | 9.5% | Rs 1.64 lakhs | Rs 20,099 |
| Rs 8 lakhs | 8 year | 9.5% | Rs 3.45 lakhs | Rs 11,929 |
So, you see that though the EMI is double in the shorter duration loan, the total interest paid will be half of the longer one. Also, the interest rate charged on longer tenures, are higher compared to shorter loan tenures. On a car loan, a bank will charge around 50 basis points more on the longer tenure. This is for taking into account the higher credit risk that the lender is exposed to on the long term loan.
Another point to consider is, the average usage for a first-hand car is usually 6 years. After that, it is sold to a second-hand owner. If the initial owner takes a longer-term loan, it will be very difficult for him, since he would have to shell out EMIs, even after selling the car.
How to apply for a car loan?
Before availing of a car loan to purchase a car, you should consider the following factors.
1. Have your credit report ready
Banks and other lenders refer to your credit report before approving your loan application. Your credit report proves your creditworthiness and helps to develop the trust factor among the lenders. Most of them fix loan interest rates based on your credit score. Loan applicants with a score of 750 and above, have an increased chance of loan approval at lower interest rates.
You have to obtain your credit report from the credit bureau or online lenders before submitting the loan application. If you identify any discrepancies or errors, you should report it. A correct and good credit report will lead to a higher credit score.
2. Compare Interest Rates
Based on parameters like model of the car, your credit score, lender, salary, repayment capacity, etc., the car loan interest rate can start from 7.10% upwards. However, some car finance companies can even offer lower rates than banks. Many lenders even offer special festive discounts on interest rates for a limited period.
So, make sure to check with banks for special car loan offers, if any. You can also visit online lending websites to compare the car loan rates offered by other lenders.
3. Compare the (Loan-To-Value) LTV ratios
LTV ratio of a car loan is the proportion of the price of the vehicle financed by the bank. The borrower has to pay the down payment from his own funds. This varies across lenders depending on the credit profile of the borrowers. So, a car loan applicant should consider LTV ratios while comparing different loan offers.
Try to make higher down payments, as it will reduce the interest cost. It will also help you to get lower interest rates and better deals on loans.
Car Loan Calculator
It will help you to find out the car loan EMI, that you will have to pay the bank every month until you fully repay the loan.
The EMI is based on the interest rate, the loan amount, and the tenure. To arrive at the EMI, one has to put in the following data:
Interest rate - It has to be between 1% and 50%.
Loan amount - It has to be between Rs 1 lakh and Rs 40 lakh.
Tenure - It is between 1 year and 7 years.
Different lenders offer loans at different rates; so, the rate of interest varies.
When you put in these variable amounts in the calculator, you will arrive at the following:
- The EMI - The loan instalment is payable monthly until the entire loan amount is paid off.
- The break-up of the EMI between the principal amount and the interest component.
- The amortisation schedule - It reflects upon the break-up of the paid loan interest as well as the principal amount repaid through the EMI that the borrower is paying on a monthly basis till the end of the loan tenure.
How to apply for a car loan online?
It is risky for most people to go to a bank to apply for a loan, while the pandemic is raging. However, most banks have made provisions for applying for a loan online. Customers can apply for a car loan by going to the official website of any of the top banks. If you have a high credit score, your loan will get approved quickly.
Some banks like State Bank offer 100% financing on the on-road price of the car.
Who can apply for a car loan?
Though your car loan eligibility will vary among different lenders, most lenders follow the following criteria before approving loans:
| Particulars | Details |
|---|---|
| Minimum age of the applicant | 18 years |
| Maximum age | For self-employed it is 65 years, and 60 years for salaried. |
| Minimum annual income | Rs 3 lakhs |
| Duration of stay in current residence | Minimum 1 year |
| Lowest interest rate | 9.25% |
Car Loan Calculator
An EMI calculator helps you get a clear picture of how your repayment process is being planned by the lender. It helps to get to know the total principal amount, with respect to the interest rate and eventually the exact EMIs payable over a specific tenure while availing of your car loan.
EMI is the Principal Amount plus the Interest to be paid (every month).
Mathematically, EMI is calculated as follows:
P x R x (1+R)^N / [(1+R)^N-1]
P = Principal amount of the loan.
R = Rate of interest
N = Number of monthly instalments
Example: Suppose you are applying for a car loan from a bank of amount Rs 6.5 lakhs, at an interest of 9.5% p.a., and the loan tenure is 8 years or, 96 months. Then your EMI will be calculated as follows:
EMI = 650000 x 0.007917 x (1+ 0.007917)x96 / ((1+ 0.007917)x96)-1 = Rs 9,692
R is the rate of interest on your loan and is calculated monthly i.e. (R= Annual rate of interest/12/100). For instance, if R is 9.5% per annum, then R calculated monthly would be 9.5%/12/100 = 0.007917.
Banks and other lenders are giving a bonanza to borrowers this festive season in the form of lower interest rates and reduced processing fees. So now is the best time to reap the benefits and avail of a car loan.
Also read:
Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
The Reliability of the Indian Credit System
Online Money Transfer: Changing Contemporary Financial Transaction
![Series Funding [Types, How it works and More!]](https://okcredit-blog-images-prod.storage.googleapis.com/2021/02/seriesfunding1.jpg)
