How To Select The Best Car Loan
When selecting the right car loan, it is also important for a buyer to see if it is affordable to him/her. This will ensure that a borrower does not default on his/her payments and repays the loan as per the prescribed schedule. The decision to take a specific car loan is influenced by various factors. The real benefit can be realised only when these factors are taken together.
Analysis
A borrower can employ various ways to find out whether a particular car loan is actually worth considering. However, care should be taken that an inefficient decision is not made by focusing on certain areas, for a negative impact could overshadow good points in another area.
How much financing is available?
The first and foremost factor to be considered is the actual amount of the loan that will be available for Satya. Banks usually ask for a down payment or a margin, which is a certain percentage of the loan, and if you are looking for finance then a lower amount of margin will translate into a higher amount of the loan. Some banks can go up to 90 per cent financing, but the average figure will be around 70–75 per cent. This means that if a car is worth Rs. 7 lakh and the financing available is up to 70 per cent, then the bank will give a loan for Rs. 4,90,000. The higher the percentage figure, the better it is for a borrower. In this case, Satya will get 80 per cent financing (Rs. 2,56,000), so this is a positive feature.
Is a better interest rate possible?
The actual car loan interest rate charges are also important in this case. The rate can be negotiated based on the conditions present for a specific purchase. This means that while the stated rate might be 11 per cent for Satya if he bargains with the bank and talks about his track record plus offers available from other banks, then the bank might reduce the rate to 10.5 per cent. In this case, the interest savings will be more than Rs. 2,100 over three years. This means a lower cost for the borrower, so a low interest rate is always welcome.
More time, less EMI
The basic difference between a car loan and a home loan is the time duration available for the repayment. A car loan has medium time duration while a home loan can be stretched to 15 years. This impacts the monthly payment which goes up. A Rs. 5-lakh loan at 11 per cent repayable in 3 years will have an equated monthly instalment (EMI) of Rs. 16,369 but with the same conditions the EMI for a 15-year loan will drop to Rs. 5,683.
Banks are willing to extend the loan repayment period, from 3 years to 5 years for a car loan. It has to be seen whether Satya’s bank actually offers flexibility in repayment. In case of this feature longer need not be better but it is important to have the time period to match with the requirements of Satya.
What are the costs attached?
There are also several costs that are associated with a car loan. Processing fees are charged at the time of taking the loan while prepayment penalty has to be paid when the loan is repaid before time. Both these are a specific percentage of the loan, usually in the range of 0.5–2 per cent.
This can be an additional burden because if the car loan figure is high then the cost will also increase for the individual. Satya should be checking out these figures to know the actual amount that he would have to pay. Usually, processing fees are charged but if there is no prepayment then the related charges can be saved.
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In case of default, there would be additional charges to be paid plus a penalty of interest for the payments missed. The cost is usually around 2–3 per cent of the amount missed plus there will be an interest cost on the amount that has not been paid.
But more than the cost, here the real impact might be seen in the credit history where defaults can impact future loans. If a car loan is repaid properly then it is easier to ensure that future loans are available quickly with less of paperwork and effort. The lower the cost the better it is for Satya, but penalty costs for most loans are in a narrow band so this might not be a distinguishing feature in the loan-taking decision.
Source: http://www.rupeetalk.com/articles/car-loan-articles/how-to-select-the-best-car-loan.php