Finance Your Dream Car – Take Car Loan

Having your own vehicle today is more a matter of convenience than pride because with it comes the flexibility to travel unencumbered by hindrances such as taxi strikes or even the public transport not being able stick to the time schedule because of traffic among other things.

With car finance now available much more easily, more and more middle class families are opting to buy a car without much concern about finance because the payment for the vehicle will have to be made over the tenure of the loan which is typically 5 years. Are you among those who also want to own a car but do not know the semantics of taking one on loan? This article aims at answering your questions.

What are the features of a car loan?

• The tenure of the loan could range from one to seven years
• Processing fee is charged which is a onetime fee for processing and legal paperwork. It typically ranges between 2% and 4%
• Pre-payment penalty is also levied if money is paid back before the tenure. Also many a times, the pre-payment option does not give flexibility of part payment.
• Car loans in most cases do not require a guarantor but if the income earned by the individual does not meet the credit criteria, then a guarantor will be needed for the loan. Guarantor can be your spouse is he/she is employed or a third party guarantee will also do
• Banks generally offer a preferential treatment to their existing customers. If you have savings or current account with a bank, it is easier to get the loan and you might also get preference in terms of rate of interest

What quantum of loan will I get i.e. Loan to Value ratio?

Most banks and financial institutions categorize cars into segments, which is one of the parameters used for deciding the loan to value ratio (LTV) ratio i.e. quantum of loan against the value of the car. So if the LTV is 80%, it means 20% of the car cost will have to be paid by you and for the remaining 80% you will get a loan from the bank/financial institution.

Illustration

For the salaried and self employed class, up to 100% Ex-showroom price subject to the segment can be provided as a car loan. The LTV is dependent on your credit profile, and the type of car you plan to buy. So if your credit profile is not as attractive, the LTV can be a lower amount.

Although many financiers promise or have schemes that give 100% car finance, it doesn’t turn out to be 100% because the financier will either take a deposit from you or an advance EMI. So you need factor that in while negotiating for the loan so that you have finance at your disposal.

What are the various repayment options available?

There are several types of repayment structures are available. You can opt for any one of them only if the bank/financial institution is willing to offer it to you because they take into consideration your credit profile and repayment facility while deciding the same.

• Regular EMI: The EMI is the same throughout the tenure of the loan. The interest rate charged on this variant is the lowest compared to the other structures. The installment can be paid in the beginning of the month (monthly in advance) or the end of the month (monthly in arrears).
• Step up EMI: Under this, the EMI increases over the tenure of the loan, the first year having the lowest EMI and the last year the highest. The interest rate on this is higher than that of regular EMI.
• Step down EMI: Under this, the EMI at the beginning of the tenure of the loan is high and it gradually reduces over the tenure of the loan. So in the first year, the EMI will be the highest and in the last year, it will be the lowest. The interest rate here also will be higher than regular EMI.
• Balloon EMI: At the end of the tenure of the loan, a onetime payment i.e. a lump sum payment of up to 20% of the principal has to be made. The interest rate here also will be higher than regular EMI.
• Lease and refinancing: The buyer has to pay the financer the EMI that consists of the monthly lease rent, finance charges and other charges if any. At the end of the lease term, the car buyer has the option of paying the resale value and transferring the ownership of the vehicle, or selling the vehicle and paying the financer’s pre-assessed value of the car or just paying a fixed charge for the financer to dispose the vehicle. This is not a popular and few financers offer this option.
• Super Savings tie-up: Here the finance ties the current account or super-savings account to the loan amount. This enables the car buyer to route any excess funds from the savings bank or current account to the loan account, thereby reducing the outstanding with the financier. This is offered by a few multinational and private sector banks.

What security/collateral do I have to provide?

The financer will not seek any additional security/collateral apart from the vehicle against which the loan is granted which has to be hypothecated to the bank.

What are the steps you should follow for applying for a car loan?

First select the type of car(s) you will like to buy and make sure it falls within your budget. Do a back of the envelope calculation to figure out what is the quantum of loan you will need and then zero in on your loan requirements. Now it’s time to apply for a car loan.

The steps involved will be as follows

• Application & Processing of the loan: Seek preliminary quotes from various lenders on the car you have selected. Negotiate with them to get the best interest rate quote after which you should select the lender based on the attractiveness of the loan and then apply for the loan. You will need to pay the processing fee to the bank/financial institution to process your application after which you will get an idea on the LTV among other things.
• Submission of Documents: All the relevant documents such as income proof, identity proof, residence proof etc. have to be submitted. In addition you may be needed to produce copies of Income tax returns for the past 2 years, bank statements, passport, driving license among other documents. This will vary from lender to lender.
• Field Investigation: After submitting the documents, the facts provided in the document will be verified. The process will move forward only if the results are to the satisfaction of the lender.
• Sanction & Disbursement of the loan: If the lender is satisfied with the authenticity of your documents, the loan is approved and then it is disbursed though cheques or demand drafts.