After months of setbacks due to the pandemic, businesses are embarking on a recovery path and many employees are returning to offices. If you are prioritizing buying a car to minimize public or share transportation, and taking a car loan for it, here’s what to keep in mind.
Have a budget for your car loan
Don’t benchmark your affordability based on the EMI advertised. Lenders offer finance up to 100% of the car cost and give a loan for up to seven years. However, don’t stretch your financial limits.
There is a thumb rule that the on-road price of a car should not exceed 50% of one’s annual income. An individual earning Rs 20 lakh annually should at best buy a car whose on-road price is Rs 10 lakh.
Have a clear-cut budget and assess the stability of your cash flows.
Follow the basics
Make a down payment of at least 20% of the car price. Ideally, take a loan for no more than four years. Limit your car EMI to 10% of your monthly salary.
The longer the term of the loan, the greater the interest you pay. For instance, total interest payments for a 4-year loan (at 9% interest rate) are Rs 97,242 as against Rs 1.75 lakh for seven years. Ultimately, it increases the car cost by 35% – from Rs 5 lakh to Rs 6.75 lakh.
Some financiers have a higher interest rate for a short-term car loan to compel customers to take long-tenured loans. Don’t fall for the bait.
Moreover, incremental benefits in the form of lower EMI start falling as you stretch the loan tenure from three to five or from five to seven.
If you are paying other EMIs (home, education loan, etc) then make sure that you are not paying more than 40% of your take-home income towards all EMIs combined.
Evaluate car loan deals in entirety
Discounts and freebies are galore during the festive season. Many a time, car dealers give discounts indirectly by way of loans at zero or low-interest rates.
Each dealer has a tie-up with different lenders – so the offering varies.
So, evaluate the deals in their entirety and after accounting for all expenses, shortlist a lender. Sometimes, it might be cheaper to buy a car from a dealer while taking a loan independently from a finance company.
Get a pre-approved loan beforehand. It will help you bargain hard with financiers. Given month-end targets, some dealers/financiers may be ready to give you extra discounts over and above the usual. Banks and NBFCs usually waive off processing fees (about 0.5% of loan) for creditworthy customers or their existing deposit holders.
Check your car loan prepayment fees
If you prepay a home loan, usually there are no charges up to a limit. But not for a car loan.
Prepayment charges are as high as 5% of the principal outstanding for a car loan.
However, some PSU banks are waiving it for their customers. Furthermore, some banks don’t allow prepayment in the initial 12 months of taking a loan. Do the necessary due diligence.
Read the fine print carefully
Low-interest rates advertised are applicable to those with the highest creditworthiness as evaluated by CIBIL. Armed with an excellent CIBIL score, you can even bag a customized deal.
Lastly, know that many car loans are of floating-rate nature and linked to the repo rate. If interest rates start rising in the economy, your loan tenure will go up and restrict your contribution towards other important financial goals.
So, keep the necessary financial cushioning.
Evaluate deals in their entirety and follow the necessary financial thumb rules while taking a car loan.