6 dos and don’ts before applying for a car loan

Do’s

1. Fetch your credit report before applying for a car loan

Interest rates on loans are decided by parameters such as the source of income, gender, and credit score. If you have a high income but a poor credit score, your loan rate may still be high. Lenders fetch the credit reports of car loan applicants to check their creditworthiness. “Those with credit scores of 750 and above usually have higher chances of loan approval. Many lenders also offer preferential lending rates to those with higher credit scores. Hence, those planning to avail car loans should fetch their credit reports from credit bureaus at regular intervals from at least six months before submitting their car loan application,” said Gaurav Aggarwal, Director, Paisabazaar.com.

Also Read | Battered infra dream awaits a new deal

2. Know the interest rates and charges

The car lending marketplace is diverse and full of options. Therefore, you can go online to compare your options from the lenders you prefer. “A reducing balance loan with low interest and low charges is ideal. Beyond the interest rate, know what various loan charges are,” said Adhil Shetty, CEO, BankBazaar.com. A car loan can be up to 7 years long in most cases, and it is therefore a long-term relationship with the lender. Hence what you would pay throughout the loan also matters.

3. Get your documents in order

Proofs of income, address, age, employment etc. are necessary for the loan application process. Therefore, know which documents lenders typically need and get them ready before the loan application. For instance, for salaried persons, salary slips, and the latest income tax returns statements are normally required.

4. Check the prepayment or foreclosure charges

“Usually, lenders levy prepayment charges on car loans offered at the fixed interest rate. Such prepayment charges can cost up to 5-6% of the outstanding loan,” said Aggarwal. Moreover, some lenders also limit the amount and number of prepayments during the loan tenure. Hence, if you are opting for fixed-rate car loans, you should prefer lenders imposing minimum restrictions and charging the least on making prepayments.

Don’ts

5. Do not overestimate your EMI affordability

At times, overestimating your Equated Monthly Instalments (EMI) affordability can increase the risk of EMI defaults due to income disruptions or other financial exigencies. Such repayment defaults incur hefty charges and penalties and can also adversely impact your credit score and thereby, your future loan and credit card eligibility.

“A car loan applicant can know his EMI affordability by deducting his mandatory monthly expenses, monthly investments for crucial financial goals, insurance premiums, existing EMIs, etc from his monthly income. Once he knows his EMI affordability, he can opt for the shortest tenure as per his affordability to reduce his interest cost,” said Aggarwal.

A lower down payment means you need to convert a higher loan amount into EMI and have to bear higher interest costs in the future, and vice versa. For instance, if you buy a car worth ₹10 lakh then by paying ₹2 lakh as down payment, ₹8 lakh would have to get converted into EMI for seven years. In such a case, you would have to bear additional interest payment of ₹3.15 lakh till the time you pay all your EMIs (assuming a 10% car loan interest rate).

Similarly, if you would have made a higher down payment, for say ₹4 lakh, then ₹6 lakh would have to get converted into EMI for seven years. In such a case, you would have to bear additional interest payment of ₹2.36 lakh only. Shetty said, “You need to optimize borrowings and out-of-pocket expenses so that your EMI burden isn’t too high. You must also remember that a car is a depreciating asset, and therefore what you spend on it either out of pocket or via loan interest, should be tightly controlled.”