With rising incomes over the years, as well as massive increase in traffic and pollution, owning a car is no longer the “status symbol” it once was. While some commuters may prefer cabs or public transport, having (at least) one car in the family is quite common now.
For many, this is also linked to professional growth so the higher you rise in your career, the higher your aspirations when it comes to choosing a car brand. Money is no problem as banks and finance companies are happy to offer you a car loan, and here are some points you should keep in mind when taking a car loan.
1. Check your credit score
This is a must before applying for any loan. The RBI has made it mandatory for credit bureaus to give one free credit report per calendar year to an individual upon request. Get your credit report and check your credit score to determine eligibility for a loan. If your score is on the lower side, no worries – there are ways to improve your credit score.
2. Pre-owned vs new car
Once that is out of the way, decide if you want a brand new car or a pre-owned car. Cost aside, there’s also a difference in loan terms offered for pre-owned cars compared to new cars. Some banks also have tie-ups with authorised dealers of pre-owned cars which can get you additional benefits.
3. Negotiate the cost and extras
Irrespective of showroom sticker price, there is always room for negotiation. Visit other dealerships and check for the best price. Dealers are more than willing to offer a discount if you ask – question is, how much? You can also get a good bargain where the dealer will throw in some extra fittings/accessories or pay the insurance premium for the first year to sweeten the deal. Verify the on-road price taking taxes and other fees into account.
4. Choose the lender
There is no shortage of options and these lenders can be broadly classified as;
a) bank in which you have your salary account
b) third-party finance company
c) finance arm of the car manufacturer (a group company)
d) bank which has a tie-up with the car manufacturer
5. Look for the best loan terms
A car is a depreciating asset whose value takes a hit the moment it is driven out of the showroom, so once car model and price is decided, check
a) loan eligibility – multiple of your monthly/yearly income or for a pre-approved amount
b) financing – some banks/finance companies offer loan upto 100%, others finance 70-80%
c) loan coverage – if loan covers only showroom price or on-road price
d) interest rate and type – lower the better, and whether fixed or floating rate
e) tenure – shorter the tenure (3-5yrs), the lesser your overall outflow, compared to a 7yr tenure
f) repayment – fixed EMIs, step up/down EMIs (instalment value increases/decreases each year), balloon EMIs (lump sum paid at the end)
Check with at least 2-3 banks/finance companies before finally selecting one.
6. Hypothecation formalities
When you take a loan to buy a car, it is hypothecated to the bank/finance company you take the loan from, which gives them the right to seize your car if there is any default in payment of the EMIs. The bank/finance company’s name will be on the car’s registration certificate. Once your loan is paid up, you will get confirmation of loan closure with a No Objection Certificate addressed to the RTO, removing the hypothecation. This is usually valid for 3 months so once received, submit a copy to the insurance company for change of ownership in the policy and then to the RTO to get a new registration certificate issued with your name as the owner.
7. Always read the fine print
Check the loan terms for details on processing fees, pre-payment charges, if partial payment is allowed and any other clauses that could affect you later.