Deciding upon a car loan and its provider is just a part of the entire loan process. There is a lot more that is required to be done when it comes to getting a car loan. One of the areas where people might face problems is the eligibility criteria deciding the amount of a loan. The loan taken by an individual has to be in tune with the income that is being earned so that there is no mismatch between the two.
Sanjay is salaried, with an annual income of Rs 3 lakh. It has been his dream to own a car and being unable to finance the entire purchase through his own funds he has been looking for a loan. He has zeroed in on a couple of banks that would provide him the loan and is now studying the exact condition with respect to the amount of loan that can be taken. Both banks have slightly different conditions, so Sanjay is checking which one he would be able to fulfil and get the loan.
- Car loan conditions are different for salaried people and businessmen/professionals
- Loan amount is decided by the type of the income (net/gross) and an actual multiple charged by a bank
- Banks use a lower multiple for salaried people compared to businessmen/professionals
Analysis
A car loan has several conditions to be fulfilled by an individual. One main condition relates to the actual amount of the loan that a borrower will be eligible for. To determine this amount, the multiple of the salary or the income earned by the borrower is taken into consideration. This figure will change from bank to bank, depending upon their internal conditions. Several banks also consider factors like stability in the job and age, but these conditions are primarily used to determine whether a person is eligible for the loan while the income condition decides the amount of the loan.
There is a further difference – the conditions vary for both the salaried as well as those who are in business and profession.
There are two things that actually determine the amount of the loan. One is the actual multiple charged by a bank and the second, type of the amount, i.e., gross or net. The type of the amount is decided in terms of what items the bank considers when looking at the actual amount of the loan. For example, for a salaried person the loan is normally available at 2 to 4 times the annual income while for a businessman the figure is 3 to 6 times the annual income. One must note that in most cases the multiple for the salaried will be lower as compared to those in profession or business.
In the case of Sanjay if just this criterion is taken into consideration where the multiple is 2 times the gross salary then the amount of loan that he would actually be eligible for will be Rs 6 lakh. In case of a businessman with an annual income of Rs 3.9 lakh and the eligible multiple of 3 times, the loan amount will be Rs 11.7 lakh.
Now when the second condition is brought into the picture the situation can change. In this case the working will be different and might require the borrower to reduce a few items from the gross income in the earlier calculation. These items would include taxes or other contributions like provident fund and so on. In case of a professional, there might even have to be an addition to the income for several non-cash expenses like provisions and depreciation if allowed.
If this is the case and in our example Sanjay's income drops to Rs 2.5 lakh, then the eligible loan figure will go down to Rs 5 lakh. However, the other bank might provide a higher multiple which can actually raise his total loan eligibility even though this is on a lower base. This calculation can change quite a bit of the figures and the impact of each of them would also be different because the amount will be different for different people.
For a borrower like Sanjay, a higher multiple is good in terms of a higher eligibility for a loan. Further minimum but valid deductions are helpful in ensuring that the right amount is actually available as a loan that can be paid off.
