How to select an auto loan provider

Most people buy their cars using finance, and that makes auto loan an essential part of the entire buying process. In such a situation, a buyer has to take due care of the finer points of the loan, including the fact that the loan is selected from the right institution. Before selecting a loan provider, a certain considerations have to be known. Which are these conditions? Let’s take a look at some of them:

Interest rate

One of the most important factors in the auto loan selection process is the interest rate that is being charged by a bank or institution. The auto loan market is awash with different types of loans that come with different rates of interest. In such a situation, you have to understand that an effective lower interest rate will mean a lower outgo for you as a consumer. However looking at just the rates will not be enough, you will also have to pay attention to the method that is used to calculate these rates.

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It is important to know that the interest rates are on the same level, meaning they are of similar type. For example, there are loans that calculate interest on a flat rate basis and others that use a reducing balance method. A 9 per cent flat rate will be equivalent to 16.4 per cent in case of reducing balance basis. If one is looking at comparing these rates then both have to be calculated under the same method so that the benefit is visible for a buyer and he/she can easily select a lower rate.

Payment structure

With banks offering competitive rates to attract customers it becomes important to understand the payment structure of a loan. A bank or an institution can offer a teaser rate for an initial time period and later make a sharp increase in the payment. In such a situation, the question arises is whether you can afford the entire payment because of the rising interest rate at a later date.

The mode of payment of the loan has to be such that it is convenient, is affordable to you, and can be matched to the cash flow that you generate. Thus do not make a decision just on a 8 per cent or 9 per cent initial rate if this is going to change in the later years but calculate the overall impact over the life of the loan. At the same time, some banks are willing to lend for longer periods to bring the payment within control. This will ensure that there is some element of matching between what you are paying and the amount that you can actually afford. A move to a longer term loan and a simple payment structure is in your benefit, so look out for these factors in a loan provider.

Down payment

The entire loan proposition will also involve the amount of the loan. There are various percentages of down payments that are required by various institutions. In several cases, even though the interest rates are slightly lower you might be expected to bring in a large sum as far as the down payment is concerned.

This can be quite difficult to achieve because of the fact that a large amount might not be available with you and that is the reason why a loan is required. For example, a Rs 4.2 lakh car purchase might require Rs 60,000 as down payment for one bank while another might ask for Rs 1,40,000 as down payment. This can prove to be a tough condition and hence also has to match the ability on your part to pay the required amount. If you are looking for a higher funding then opting for a lower down payment will be a wise decision.

Prepayment

There are differing conditions with respect to the prepayment of the loan and once again there has to be flexibility on this side. If there is flexibility then an individual also has the freedom to pay back the amount when he/she has the necessary money. However if this is not possible or that there is a large charge that has to be paid when such a situation occurs then there will be an increase in the cost as far as the individual is concerned. In such a situation, ability to prepay at your convenience without a charge or a low charge is what should be considered while taking the loan.

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