One of the first things you need to look at while taking a car loan is the monthly installment, popularly known as the Equated monthly installment (EMI). While different banks would give you different quotes depending upon their rules and regulations, you must compare your monthly outflow for the same amount and for the same tenure. Remember that the effective interest rate is a function of the reducing balance method being used to calculate it.
Reducing balance is the method of reducing the principal amount being repaid, from the outstanding loan amount. Every time you make a payment, the interest you pay is calculated on balance outstanding principal. Different banks can use different methods like:
Daily - In this method, the principal is reduced every day as if you were making repayment of the principal on a daily basis.
Monthly - In this method, the principal on which you pay interest reduces every month, that is, when you pay your EMI.
Quarterly - In this method, even though you keep on paying you EMI, the principal reduces only every three months.
Yearly - In this method, the principal is reduced finally, at the end of each year. This effectively implies that though you have paid back a part of the loan during the year, the principal outstanding gets reduced only at the end of the year.
This simply means that the earlier the principal reduction is done, the lower the amount you will pay to the bank. Nowadays, almost all banks offer the daily reducing method as it has more or less become a norm in the industry. However, it is better that one is aware of such things while going for a car loan
Car Loan: Application Process
Here is a step-by-step break-up of the car loan application process:
Step 1: Enquiry with a lender:
The first step is to get in touch with a lender. You need to get in touch with as many lenders as possible and get them to make loan offers to you. Then negotiate with them to get the best interest rate. Check if there are any special offers.
After you have got all the banks to make their offers to you, select your lender based on the information you have in front of you.
Step 2: Documents Collection
After you finalize your lender, the lender's direct selling agent will visit you and collect documents supporting proof of income, residence proof, and identity. You may be required to produce copies of IT returns, salary slips, bank statements, passport, driving license, and other relevant documents. These requirements vary from lender to lender.
Step 3: Field Investigation Agency Representative Visit
After submitting the documents, a field investigator will visit your home to double check the facts provided in the documents, such as your place of residence, tenure at work place, and so on. It is essential that you are present during this visit to clarify any query that the investigator might have. Otherwise, the investigator might not get all the facts clearly and could report that the facts you provided do not actually add up - thus forcing the lender to reject your loan application.
Step 4: Loan approved
Once the lender is satisfied with the veracity of your documents, the loan is approved. The lender then disburses the amount through cheques or demand drafts (DD).
How much car loan can I get?
Banks finance 90-100% of the ex-showroom price of a new car.
The maximum amount financed for used cars vary from 80-90% of the car's value.
If your income is not sufficient to get the loan amount that you want, you could club your spouse's or relative's income along with yours to get a higher loan amount.
Processing fee for car loans
Let us take an example. If the processing fee is say, 2 per cent and the loan amount you have applied for is Rs 2,00,000, then the processing fee works out to Rs. 2000. So, you will get Rs 1,98,000 in hand when the loan is sanctioned.
This fee is important for
one to consider, since banks charge different rates. This actually can
make a big difference on the real cost of the loan.
Car loan paperwork
Read each document carefully
for errors. Once you sign on the dotted line, the deal is done. If something
does not feel right, don't sign. Do not feel pressured or obligated to
sign just because of the amount of time invested by the salesperson.
Charges applicable before
and after a car loan disbursement
Here is a list of all charges that are levied before a loan is disbursed, through the course of the loan, or when you terminate the loan:
Description of Charges:
* Processing fee
* Prepayment fee
* Charges for late payment
* Cheque bounce charges
* Documentation charges
The bank charges you an amount as a processing fee. This fee may vary from bank to bank. The bank deducts this amount from your loan before disbursal.
The processing fee is generally a percentage of the loan amount and is between 0.1- 1% for car loans. Some banks levy a flat charge of Rs 500- Rs 2000 upfront, and then deduct the balance processing fee (if any) from the loan amount before disbursal.
This fee is important for one to consider, since banks charge different rates. This actually can make a difference on the real cost of the loan.
Most banks charge you a penalty when you opt for the option of prepaying the loan amount. This prepayment penalty is levied because when you prepay your loan, the bank loses income in terms of interest.
Ideally, you should go for a bank that does not charge you any prepayment penalty. In case there is no such bank, you should go for the one that charges the least.
The prepayment fee varies
from bank to bank. It varies from 1% to 5% of the outstanding loan amount.
Banks levy documentation
charges towards the verification of the various documents you provide towards
the loan application. The expense on this account is usually passed on
the customer, which range from Rs 250 to Rs 500.
Differences between motor
* Pedestrians, occupants
of other vehicles etc except those within your vehicle
This cover does not go to fire and theft accidents, for which you need to pay additional premiums.
Motor Policy B: The premiums of this "comprehensive insurance" are much higher than those paid for regular insurance cover. This type of policy covers both third party insurance and own damage liability. Covered under this policy are:
* Loss or damage to the vehicle
caused by environment as well as other reasons. That is, accident, fire,
explosion, lightning, theft and other malicious acts are covered under
Prepayment charges on auto
Ideally, you should go for a bank that does not charge you any prepayment penalty, but in case there is no bank that offers this facility, you should go for one that charges the minimum.
The idea of prepayment arises from the fact that you can get rid of your debt whenever your finances improve. Also, it is a great way of reducing your interest cost. Moreover, if there is another bank that is offering you a better rate (lower rate) you can shift your loan to that lender.
In fact, many banks even cap the amount (or a certain percentage) that you can prepay at one go. That is, the bank may put a clause that if you pay more than 5 per cent of the outstanding principal, you may attract a certain fee. This basically implies that banks would like to discourage you from prepaying the loan, as it results in a loss of interest income
Team-BHP shows you how to get the best possible financing deal for your shiny new wheels:
1. Shop around: While this advice seems obvious, it is often ignored: getting rates from several brokers and car dealerships is the key to a good deal. If you intend to buy a Honda in Mumbai, bargain with Ichibaan / Linkway / Arya and any others. When you ask for your quote, tell the vendor that you intend to shop around and be certain that they know you are serious about buying. Casual inquiries take up a lot of time for dealers; an inquiry with good sales potential will make them bend over backwards for you.
2. Negotiate: Many people don't realize this, but if you want a great financing deal you will have to negotiate for it. Negotiate hard. Pit at least three competing quotes against each other and start bargaining with each vendor. You will be surprised at how quickly the offered equalized monthly installment (EMI) payment will drop in the course of an hour of simple bargaining. And its a LOT of fun too!
3. Targets: Start negotiating in the third week of the month. Most Indian agents have monthly targets and generally save the best rates for last minute deals to fill their quota.
4. Other accounts with the same institution: Leverage any existing relationship (credit cards, investments, etc) that you have with your financial institution. Most banks will offer a 1 - 2% discount based on the fact that you are already a known quantity to them.
5. Do not take the interest rate at face value: When your broker says that his great interest rate has been calculated "just for you", you don't have to take his word for it. Use any one of a number of online calculators to compare; chances are, your broker is bluffing.
6. Manufacturer financing plans: Some manufacturers offer financing plans that are less expensive than broker or dealership options. For e.g. the Tata finance option.
7. Nationalised banks: Nationalised banks like the State Bank of India have very competitive auto-loan packages that usually offer the best rates and terms, especially if you have an existing relationship with them. Meet with your branch manager for a quote.
8. Hidden fees: In today's competitive market there is no such thing as a processing fee for a car loan. Ask for an all-inclusive quote and check the fine print for hidden charges. These miscellaneous fees can amount to thousands of rupees. You will also see a difference in stamp duty charges etc. from one proposal to the other.
9. Do NOT opt for ECS: Even though automatic electronic withdrawal from your bank account is supposed to make life easier, the system is not yet a 100% reliable in India. Make your loan payments the old-fashioned way with cheques and read the Team-BHP forum discussion on ECS for more details.
10. Be wary of unauthorised dealerships: Even if you get a great financing offer, check to see who will be delivering your car. Some Direct Sales Agents (DSAs) have connections to unauthorised dealerships. These dealers often engage in shady practices like supplying counterfeit spares and are generally not worth buying from.
11. Pre-payment penalties: Some banks charge rates as high as 5% of the total loan amount if you pay off your loan early. Check to see if your bank included a pre-payment penalty in the contract and ask for a waiver / reduction if you intend to pay the loan early.
12. Maintain a good credit history: Financial institutions in India maintain a central database to keep track of your credit history. It is essential to keep a clean credit record by paying credit card bills and other loan EMIs on time
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