Car loans have significantly enhanced the affordability of purchasing and owning your own vehicle.- Applying for a Car Loan
They are beneficial as you only have to pay the amount required for the car’s down payment. The remaining balance can be paid via a car financing option that comes at a reasonable interest rate. The borrowed sum can be paid back to the lender in the form of equated monthly installments (EMIs) for a maximum of five years.
So, if you’re looking forward to buying a car by applying for a car loan, you’ll have to consider some factors to fetch yourself the best deal possible.
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Check Your Credit Report Before Applying For a Car Loan
When considering your car loan application, the lender will evaluate your credit report to determine your creditworthiness. Several lenders even offer pre-approved car loans after checking your credit score. Usually, individuals having a credit score of 750 or above stand a higher chance of getting the loan approval.
If you have a high credit score, the chances are that your lender will charge you a lower interest rate. Thus, it’s essential to have your credit report from one of the online lending marketplaces or credit bureaus six months before opting for a car loan. This will let you know your credit score beforehand and provide ample time for improving it with some corrective steps.
Rectifying errors and fraudulent transactions can improve your cibil score and, thus, your chances to get a better deal.
Compare Car Loan Interest Rates Offered By Different Lenders
There are several car loan types you can compare on the internet to find which one offers the lowest interest rate possible. The interest rate on car loans can range between 8% to 16%, depending on the car model, repayment capacity, employer, credit score, lender, etc.
You can also check whether your existing bank has any car loan offers or not. Compare this by going through online lending marketplaces to determine the best deals from other lenders that fit your credit score, income, and other eligibility criteria. When comparing all these options, check on the dealer finance companies for their car loan offers, too.
Loan to Value Ratio (LTV)
This ratio is nothing but the fraction of your car’s cost price that the lending institution will finance. The remaining amount, also referred to as the down payment or margin amount, needs to be paid from your savings. As no lender pays 100% of the car’s cost price, it’s crucial to compare the LTV ratio from different lenders.
However, try to pay a higher amount of down payment, as this will result in a reduced interest cost. The higher the down payment, the lesser the interest rate for your car loan. Also, it benefits you to enjoy better loan terms. Although when doing this, try not to give away your emergency funds or get into other debt for the down payment, as this can severely affect your financial condition.
Evaluate Your EMI Affordability
You must deduct all your compulsory monthly expenditures, such as existing EMIs, household expenses, insurance premiums, and rent from your monthly income to determine your affordability for the car loan.
Keep in mind that almost every lender prefers to grant loans to individuals whose total monthly EMIs, including the loan amount for the new car loan, are less or equivalent to 40% of their net monthly salary/income. So, once you get to know your car loan EMI affordability, go for a short tenure as it will reduce the interest rate.
Don’t Miss Out on The Processing Fee
When buying a car via a loan, you’ll have to pay a processing fee.
Although several lenders waive off or reduce your processing fees during special offers or sales, it’s your responsibility to check whether they’re charging any high-interest rates or additional fees to compensate for that concession.
Know All About The Pre-Payment or Foreclosure Charges
You can significantly reduce your interest cost for the car loan by making a prepayment. However, several lenders incorporate pre-payment charges on your car loans, ranging as high as 6% on the outstanding loan amount.
Some lenders even cap the amount and number of pre-payment permitted during the whole tenure or a year. Thus, when considering the lender, pick the one with minimal limitations and the lowest possible charges on pre-payments.
Check The Loan Contract/Agreement
Lastly, before you finalize the deal, remember to carefully check and verify all the paperwork related to your car loan. It is an excellent way to determine whether the bank or lender has levied any hidden charges upon you or not.
Check the lender’s terms and conditions and sign it only if you’re satisfied with it.
Enjoy Your New Car Without Worrying About the Finances
If you welcome a new member to your family – a new car that is – it’s a decision that will bring forth happiness. However, you must spend money wisely, choose the best lender for your car loan, and don’t rush into making any decision.
So, get the most out of this guide to know what considerations are to be made before applying for a car loan and make an informed buying decision.