For car loan, check lenders on their total borrowing cost and service

Select companies that offer easier terms for repayment of the loan

Vehicle loan outstanding stood at Rs 5,09,022 crore on May 19, 2023, registering a year-on-year growth of 22.2 per cent, according to the Reserve Bank of India’s monthly bulletin of July. With the festive season around the corner, more buyers are likely to approach lenders in the next few months for a vehicle loan.  

Check credit score

Lenders usually consider the credit scores of applicants while evaluating their loan eligibility. “Applicants having a credit score of 750 and above usually have higher chances of loan approval. Some lenders also offer lower interest rates to applicants having higher credit scores,” says Saahil Arora, business head, unsecured loans, Paisabazaar.

Before applying for a loan, fetch your reports from credit bureaus. “If there are any erroneous transactions or discrepancies in your credit report, report them to the concerned credit bureaus or lenders and get them rectified. This will boost your credit score,” says Arora. 

A number of factors go into determining the loan amount you are eligible for. Lenders have a down payment requirement. “Lenders usually finance up to 90 per cent of the on-road price of the vehicle. Some lenders also offer 100 per cent on-road finance for select car models,” says Arora.

Costs such as registration, taxes, and insurance usually need to be covered by the borrower. “Even if 100 per cent financing is available, it might not be the best deal. It's advisable to have some cash for down payment,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.

 

Lenders also consider the applicant’s income while deciding the loan amount. They usually offer 25-48 times the applicant’s monthly income as a loan.

Some lenders may in addition cap the FOIR (fixed obligation to income ratio). FOIR is calculated by dividing the borrower’s fixed obligations (rent, existing EMIs and the one on the proposed car loan, and so on). “They may cap the FOIR at 65-75 per cent of monthly income,” says Arora.

He suggests that a borrower who is unable to avail of a car loan due to lower income can improve her eligibility by making a higher down payment and opting for a longer tenure.

Fixed or floating rate?

Both fixed and floating rate loans have their pros and cons. Your choice should depend on the expected movement of interest rates in the near future. “If you anticipate rates to increase, you might prefer a fixed loan. Conversely, if you expect rates to decrease, a floating loan could be more beneficial,” says Shetty.

According to Raoul Kapoor, co-chief executive officer of Andromeda Sales and Distribution, “Given the recent series of interest rate hikes, floating-rate car loans could be the more viable option, especially considering the potential for rate cuts in the future. However, if you prefer to avoid risks and are comfortable with a stable interest rate, opt for a fixed-rate car loan.”

Another factor to consider is prepayment charge. “Following RBI's mandate, floating rate loans do not have this charge, whereas fixed rate loans do. Some lenders might waive this for their fixed rate loans also,” says Shetty.

Remember that some lenders may have a waiting period or a minimum number of EMIs before prepayment is allowed.

The loan tenure should also be taken into consideration when deciding on a fixed or floating rate loan. “If opting for a long tenor of five-eight years, consider a floating rate loan as interest rates might decrease within that period. For a shorter-duration loan of two-three years, a fixed rate might be more beneficial, especially if the floating rate is more expensive initially. And even if interest rates begin to fall, by the time the rate has really hit rock bottom you would have already paid out most or even all of your loan,” says Shetty.

Typically, most car loans are fixed rate rather than floating.

Loan tenure

Borrowers should factor in their repayment capacity while choosing their loan tenure. They must consider their monthly contribution towards crucial financial goals, rent, utility bills, insurance premiums and other unavoidable expenses while choosing their loan tenure. Make sure you maintain adequate monthly surpluses to make these payments after servicing your car loan EMI and other loan repayment obligations. “Car loan applicants who find their finances stretched should opt for a longer tenure to reduce their EMI burden,” says Arora.

“If you opt for a shorter tenor, your EMI will increase but your interest cost over the entire loan tenor will be lower. On the other hand, if you opt for a longer tenure, your EMI will become more manageable but the total interest cost will rise,” says Shetty.

Unlike houses, cars depreciate in value over time. Therefore, it’s wise not to increase the loan tenure unnecessarily.

Once you have determined which lenders will offer the loan amount you require, do a holistic comparison of costs. “Compare lenders on interest rates, processing fees, and prepayment charges,” says Arora.

Many lenders consider the credit scores of their car loan applicants when deciding the interest rate. Some may also consider the occupation profile and income for setting the interest rate.

“Some lenders have tie ups with manufacturers due to which they may offer a lower rate on certain cars,” says Rishi Mehra, CEO, Wishfin.com.

Car dealerships nowadays have tie ups with multiple banks and financiers. Taking a loan from them is convenient. However, you must do some research to find out if you can get a better deal elsewhere.

“If you have a salary account with a particular bank, or an ongoing home loan, it might offer you better terms. Check with that bank before settling for an offer made by the dealer,” says Shetty. 

Check online loan platforms as well to see if one of them will offer a better deal.

Borrowers should strike a balance between the EMI, tenor, interest rate, and liquidity. “This means considering factors like the amount they can comfortably deposit upfront, the amount they would like to borrow, and deciding upon an EMI that is affordable,” says Shetty.

Festive offers

Lenders usually offer discounts or waivers on processing fee during the festive season. Some also lower the spread charged over their benchmark rates to attract buyers.

“Prospective car loan applicants should compare festive season offers by comparing their total borrowing cost, i.e., total interest cost as well as processing fee and other charges,” says Arora.

Some banks might offer to waive the prepayment charge even on a fixed-rate loan. Give them preference. If you can prepay the loan without having to visit the branch, that is another positive.

Once a car loan is paid off, the car’s hypothecation to the bank needs to be removed. This requires some paperwork. “Choose a bank that has a reputation for assisting its customers in this process,” says Shetty.