Car Loan Festive Offers: Should You Take Advantage This Festive Season

Buying a car has become a lot easier with most banks and Non-Banking Financial Companies (NBFCs) offering a variety of car loans at affordable Equated Monthly Instalments (EMIs). So, if your heart has been set on a specific car for a long time or you need to buy a car urgently, you can consider taking a car loan this festive season. But before you take the leap, first understand the financial implications of availing of a car loan this festive season:

• The banks and NBFCs come up with several offers during the festive season, such as lower rates of interest, discounts on processing fees, flexible repayment options, etc. You should consider taking advantage of these offers after assessing your requirements.

• Manufacturers and dealers offer higher discounts and exciting offers on high-value cars, which can tempt you to exceed your budget. However, it can create a financial burden later if you cannot pay the EMIs on time in the future. Therefore, it is necessary to plan your budget in advance and stick to it.

• Apart from the actual cost of the car, your related expenses will also increase. With fuel prices escalating, higher car maintenance costs, buying quality car accessories, purchasing car insurance, etc., can become quite unaffordable for some car owners.

• Most car brands offer huge end-of-the-year discounts in December to clear the stock of the current year.

• A car bought in the last few months of the year gets a stamp of the previous year's model within a few months.

• Purchases such as cars are depreciating assets that will not hold the same value (you paid for) over the long term, so choose your car loan prudently.

• You can choose to pay only a 10% to 15% down payment when buying a car, as the bank finances 85% to 90% of the on-road price. Some lenders offer up to 100% financing of the on-road price. However, your monthly income and repayment capacity play an important role in determining the eligible amount of your car loan.

Apart from these financial implications, there are several other benefits of availing of a car loan during the festive season, such as instant disbursement and flexible loan repayment options (step up EMI, balloon EMI, buy now pay later, etc.). But it is not a good idea to blindly opt for a car loan by getting lured by these offers. Before taking any loan, you must assess your requirements and analyse the implications of taking the loan.

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Here are some important things you must consider before opting for a car loan:

1. Loan Offerings:

Different lenders offer different car loan features. Therefore, it is essential to compare the loans of various banks and NBFCs and choose the best-suited car loan for your budget and requirements. For example, if you are planning to buy a used car, look for lenders that are offering attractive, used car loans.

2. Interest Rate:

The rate of interest for a new car loan currently ranges between 7% to 12% p.a., depending on the lender and car model. It is advisable to do thorough research to find the best interest rate, as even a small difference in the rate of interest can make a considerable difference in EMIs you will end up paying over time. As the finance experts say, your car loan EMI should not be more than 20% of your monthly income.

3. Prepayment Charges:

Many of us try to prepay the loan whenever we have surplus funds. Many banks and financial institutions allow prepayment without any charge after a certain repayment period. You should always check with your lender what the prepayment charges are, if any, and the repayment period after which the prepayment is permitted with no additional charges.

Generally, the prepayment charges can vary from 4% to 6% for a car loan with a fixed rate of interest. As per the RBI guidelines, no lender can charge for prepayment for a car loan with a floating rate of interest.

If you already have plans of prepaying your car loan, you should opt for minimum or nil prepayment charges.

4. Processing Fee:

The processing fee is the amount that the banks or financial institutions charge for processing your loan application. The processing fee can be anywhere from 1% to 2.5% for a car loan. You will get various discounts on processing fees during the festive season.

5. Loan Amount:

Your income and age play an important role when calculating the auto loan amount you are eligible for. Applying for a higher amount than what you are eligible for will lead to your loan application being rejected. Ensure the car loan amount you are applying for is easy for you to repay and does not result in a debt burden that becomes difficult to repay.

6. Loan-To-Value Ratio:

The loan-to-value ratio, also known as the LTV ratio, is a proportion of the price of the car financed by a bank or financial institution and the down payment required to be done by the borrower. A high LTV ratio means you have to pay the minimum down payment. E.g., if the LTV ratio to a car loan is 100%, you get 100% of the amount financed by the lender. And if the LTV ratio of the car loan is 85%, only 85% of the price of the car is financed by the lender, and the remainder 15% is the down payment that you have to pay from your pocket.

7. Loan Tenure:

The loan tenure is the time frame within which you repay your auto loan. Generally, the bank lets you choose your car loan tenure from 1 year to 7 years. In certain cases, banks or financial institutions may extend the auto loan tenure up to 10 years. The bank or NBFC representative could demonstrate the calculation of a car loan with a smaller EMI by increasing the loan tenure. Note that the longer loan tenure can make your EMIs seem smaller, making the overall loan look affordable. However, the longer the loan tenure, the higher the interest you eventually pay.

8. Hypothecation:

A car loan is a secured loan because it is backed up by the car you purchase with the loan. Therefore, your car is hypothecated to the lender until the last EMI is paid. So, in case you default on the car loan repayment, the lender holds the right to seize/repossess your car to recover the unpaid dues. Once you have repaid the entire loan, you are required to remove the hypothecation by submitting the necessary documents to the Regional Transport Office (RTO).

9. Credit Score:

Your credit score plays an important role in deciding your rate of interest and LTV ratio. A credit score of 750 or above is considered good. Therefore, lenders can offer a comparatively better rate of interest.

It is a good idea to first check your credit score so that you get an idea of your credit profile and can report any discrepancies in your score. Having a good credit score can give you the leverage/advantage to negotiate with your lender on the rate of interest and/or processing fee.

10. Car Loan Eligibility:

In the table below is the general eligibility criterion that most banks and financial institutions follow. We advise you to check the eligibility criteria of the lender you have shortlisted, as the car loan eligibility criteria may vary from lender to lender.

11. Documentation:

As we already discussed, if you have a pre-approved car loan offer from your bank, you need to submit a minimum to no documents to the bank to avail of it. But in a normal scenario, you will need to submit all the required documents to the lender, such as identity proof, address proof, income proof, bank statement, business proof (for self-employed individuals), etc.

To conclude...

After considering the above-mentioned points, you can take advantage of the offers and discounts that various banks and financial institutions offer during the festivals. Whether or not to avail of a loan should be based on your needs, the cost of the loan, your current and future income, and repayment capacity. Please note that the features, criteria, rates, and charges mentioned above are general and may vary from lender to lender. Hence, it is advisable to reconfirm these aspects with the lender before applying for a loan. Most importantly, please read all the terms and conditions thoroughly to safeguard your financial interest and avoid any disputes in the future.

Warm Regards,
Ketki Jadhav
Content Writer