Buying a car is a dream that everyone cherishes. The entire exercise looks quite exciting but it can turn into a nightmare if decisions are not taken carefully.
When 30-year-old Sameer got an increment, he thought of buying a car on loan. His financial conditions are sound. He draws a salary of Rs 25,000, has no bad credit history and has enough insurance cover. He has Rs 60,000 lying idle in his savings account and can fork out a maximum of Rs 7,000 per month. Sameer has set his eyes on the Santro which comes at an on-road price of Rs 3,50,000. He also wants to get over with the loan in 5 years.
But Sameer has a genuine problem. Since this is his first car loan, he is quite not sure how to go about it and what factors to consider before finalising a loan. Here are some points to help Sameer.
What is a car loan?
Car loan is a kind of personal loan to purchase an automobile. It is a secured loan where the car being bought is pledged as collateral. Generally, car loans come at higher interest rates compared to home loans. They also charge high prepayment fees, in the range of 3%-5%. Loan value is calculated as per on-road-price of the vehicle.
Pre-approval can be a plus point
Sameer can first inquire the car loan rate with his bank and check if any pre-approved loan is available on his account. Getting pre-approval from one or several lenders will not only save him money, but give flexibility as also increase his bargaining power while dealing with a car dealer.
Shop around for the right finance
In order to find the best loan deal, Sameer should also check out interest rates with other lending institutions. He needs to find out if he will be offered lowest interest rates if he does not get extra insurance and accident covers. Some lenders also provide a rebate in interest rates if the car is fitted with anti-alarm system and the owner is insured sufficiently. Sameer thus can get a 0.5%-1% rebate on this ground. If he is planning to go with a DSA, he can look for another upfront discount as DSAs get 3% of loan amount as commission from banks. He can also negotiate processing fees (1%-2%), which is mostly waived.
Margin amount/Down payment
Generally, 15%-20% of the total car loan is paid upfront to a lender by a borrower as margin amount or down payment. Sameer's margin amount comes in the range of Rs 55,000-70,000, which he can pay off with his savings money.
The faster the payback, the more he saves
Sameer can think of prepaying his loan as his salary will increase in a span of time, and by doing so he can save a significant amount on interest cost. He can check prepayment penalty with all lenders as it is high for car loans due to short-term nature of their repayment period. For a loan of Rs 3 lakh at an interest rate of 12% for 5 years, one can save Rs 18,396 despite paying Rs 4,253 as prepayment penalty at the rate of 3 per cent, which means a net saving of Rs 14,025 in one year.
Cracking the best deal
Convenience is the word when finalising a deal is concerned. Sameer can renegotiate the deal with his dealer's in-house finance company, apprising them of the interest rates offered to him by other lenders. In order to retain a customer, the company will surely offer him a good deal. At 12% for a period of 5 years, Sameer can drive away in his dream Santro at an EMI of Rs 6,618. But remember, one needs good negotiating skills and some groundwork done as a company can dupe buyers with extra and unwarranted hidden costs.