I’d like to begin this blog post by stating that I never recommend that any of you borrow money to buy a car, as you may be aware that a car is a depreciating asset and thus what you spend on it, whether out of pocket or with loan interest, is always a financial burden. As a result, car expenditures should be kept under close supervision.
Having said that, the purpose of this article is to make you all aware of some of the do’s and don’ts while purchasing a car, particularly through a car loan.
In today’s world, all top banks and NBFCs offer car loans at highly competitive interest rates. With so many alternatives available, financing a car might be confusing for borrowers. You must optimize vehicle loan borrowings so that your EMI load is not too heavy. Read through the below points to have some clarity on taking a car loan.
Interest rates and Credit score:
First, compare loan offers from various lenders, including banks and NBFCs. If you fail to do so, you may miss out on good discounts. Each lender’s interest rates and loan terms might vary, substantially impacting the final cost of the loan. For example, one lender may provide a lower interest rate but stricter repayment conditions, whilst another may have more flexible terms but charge a higher rate. Researching around allows you to obtain the best bargain for your financial circumstances and creditworthiness. Aside from receiving a lower interest rate, comparing loans allows you to negotiate favorable terms with lenders, saving you money over the course of the loan.
While using the dealership’s financing alternatives is handy, avoid them. They may not provide you the best options. The interest rate may be higher since the lending institution pays a fee to the dealer.
Interest rates on loans are determined by factors such as source of income, credit history, and credit score. If you have a good salary but a low credit score, your loan interest rate might still be expensive. Lenders determine your creditworthiness through credit scores. Those with credit ratings of 750 or above are more likely to get a loan approved. Many lenders provide preferred loan rates to customers with higher credit scores. As a result, customers seeking car loans should have an excellent credit score in order to obtain lower interest rates.
What should be the ideal Down payment?
A lesser down payment requires you to convert a larger loan amount into EMI and pay more interest expenses in the future, and vice versa. The down payment might be as little as 10% of the car’s on-road price. However, it is recommended to pay more down-payment. While a low-down payment plan may appear appealing, it results in higher EMI amounts and an increased total interest cost.
Assume the car costs 10 lakh and you make a 10% down payment (1 lakh). For a five-year term, the EMI will be Rs. 18,683 and the total interest expense will be Rs. 2,20,951 (assuming a 9% car loan interest rate). However, if you increase the down payment to 20% (2 lakh), the EMI drops to Rs. 16,607, and the interest paid falls to Rs. 1,96,401. In the previous scenario of a one-lakh down payment, you would have to pay extra interest until you paid off all of your EMIs. So, the larger your down payment on the car you buy, the better it is for your wallet.
What should be the car loan tenure?
A car loan applicant can calculate his EMI capacity by deducting his essential monthly costs, monthly investments for important financial goals in life, insurance premiums, current EMIs, and so on from his monthly income. Once he understands his EMI affordability, he may choose the shortest possible tenure to lower his interest costs.
Car purchasers frequently pick lengthier loan terms, such as six or seven years, to make their EMI more bearable. While this may make car payments appear more reasonable, it results in a higher total interest expense. Choosing a shorter loan period, such as 36 or 48 months, may result in higher monthly payments. However, it greatly decreases the overall interest paid throughout the term of the loan.
Choose a loan duration that strikes equilibrium between an affordable EMI and a low long-term interest expense. Note that a car is a depreciating asset, thus the cost of buying it should be kept to a minimum.
Whether you should exchange the old care or sell it?
While exchange offers during the festival season are convenient, they may not necessarily result in the best value for the old car. As a result, consider selling the old car on your own to get a higher price.
Discover the best price among the different used-car app companies that are widely available today. Once you have a rough estimate of its worth, go to the dealer and request that they match it. The dealer will also make you an offer. Before making a selection, consider all of the offerings and benefits.
Right time to buy a car:
There may not be an ideal time to buy a car, as the discounts provided by the dealers during the festive times is not that much lucrative, and in fact the discounts are already factored into the car cost. So, we should not get carried away by the discount sale offers.
If you are planning to buy the car during October, November or December, then you can wait for a few more months till January and buy the car, so that the car gets registered in the January registration. This will avoid your car being one year older when it comes to resale. Your resale value will be more if it is registered in January rather than getting registered couple of months prior to January, in October or November or December.
Analyze the prepayment or foreclosure charges:
Lenders typically charge prepayment fees on fixed-interest-rate car loans. Prepayment costs might range from 5 to 6% of the outstanding loan. Furthermore, some lenders limit the amount and frequency of prepayments during the loan term. As a result, if you want a fixed-rate car loan, you should look for lenders who impose the fewest limitations and charge the lowest fees for prepayments.
Conclusion:
In the end, please keep in your mind the 5/10/20 rule, which will help you in making optimum choices when it comes to taking a car loan.
- “5” means financing a car for no more than five years loan tenure. If you choose a longer term, you will end up paying a greater interest rate.
- “10” means the maximum proportion of monthly income for car EMI payments should be no more than 10%.
- “20” means, the minimum down payment percentage should not be lower than 20%. This will reduce the total cost of your loan.
Furthermore, no more than 30 to 35 percent of your take-home income should be spent on loan payments (including the car loan).
