How long can u get a car loan for?
The desire for owning a car is gradually growing in India, according to TechSci Research (https://bit.ly/3OT1o5A). The Indian car loan market is poised for a “compounded annual growth rate (CAGR) of over 8 per cent in value terms and will reach USD60 billion by FY2026." A shift from combustion engine vehicles to electric vehicles seems to be the trend.
With the car loan benefits for both types of car loans, more people can be proud owners of new cars or preowned cars. Though car loans are easily available from banks and private Fintech lenders, borrowers need to focus on loans that fit their budget. It is easy to go overboard with loans that are beyond your capacity putting you under undue financial stress and defaults.
Before applying for loans , use an EMI Calculator to determine the loan amount you can pay comfortably, the interest rate offered by the lender and the loan tenure.
These are the most important parameters that must be given special attention. The EMI calculator helps you get the correct estimate for the tenure allowing loan repayment comfortably. You can plan a pay-off without disturbing your regular monthly expenses. Car loan tenure from most banks typically ranges from 1-7 years. The shorter the loan tenure, the higher will be the EMI. In minimum tenure for car loan, you get a faster chance to pay off debt early. The maximum tenure for a car loan keeps you in debt longer, however, the EMIs will be less, with overall higher interest.
The car loan tenure influences the EMI (Equated Monthly Instalment)
The maximum tenure for car loans increases the interest outgo
Lenders levy higher interest rates on long-tenure loans compensating additional credit risks taken by them
Minimum tenure for a car loan increases the monthly EMI but allows you to go debt-free faster
For example: Let us understand this better.
Using the Bank of Baroda Car Loan EMI Calculator as an example will help.
When choosing a car loan for ₹10 lakhs for 36 months at a rate of interest of 8% you will pay ₹31,336.
Increase the tenure to 60 months, the EMI decreases to ₹20,276
The longer tenure is bringing down the EMI, but the interest cost is being added to the loan. A smart borrower, therefore, checks the best term suitable to them.
When budgeting your monthly expenses, if you are planning to repay loans, tight management works to your advantage.
Try to take out a monthly surplus from regular expenses. Clamp the outgoing, where there is an option. Investments side by side with the loan can get tricky. So, you need to balance both, while controlling the monthly budget.
Your income has a lot to do with your EMI payback capacity. If you are expecting a promotion with financial gains, that could affect your payment tenure.
If one of your investments is maturing, the surplus you can set aside to make a pre-payment. That will lessen the loan repayment tenure and decrease the burden from your EMI.
Car loans offer an option to repay over several timelines. You could choose a minimum timeline or a maximum tenure to pay off. Longer car loan repayment terms come with a set of pros and cons.
a) Lower monthly expense
Your monthly payment of EMI is low adding less stress on the monthly expenses. The EMI tenure is dependent on the monthly income of an individual. A person seeking a car loan can have several monthly payment obligations like household expenses. Paying higher EMIs can be an added stress.
b) Banks offer repayment flexibility
If a borrower selects longer repayment terms, it does not mean that they cannot pre-pay the loan or foreclose minimising the loan tenure. However, this is not as easy as it sounds. The individual must have enough extra funds for car loan pre-payment or enough funds for foreclosure. Both pre-payment and foreclosures are charged by most banks. Losing on the interest rate, banks try to compensate for lost interest with a penalty.
c) Less monthly burden
If EMIs are low, the monthly expenses can be adjusted accordingly. The extra cash that you set aside from your income can be invested in mutual funds or alternative investments .
a. Added interest charges over time
By stretching the loan tenure to 5 years instead of 3, the loan interest compounds. Using the earlier example, where the loan principal amount is ₹10 lakhs at 8% If you pay it off over three years, you will pay a total interest of ₹1,28,109. But if you pay it off over five years, your total interest cost will increase to ₹2,16,583. Your longer repayment term makes your loan almost ₹88,474 more expensive.
b. Longer periods of debt
Maximum loan tenure stretches the loan period which means that it takes more time for you to be debt free and apply for a fresh loan. Longer term increase CIBIL score for car loan , making it possible for you to get another loan unless your loan repayment has defaulted.
Minimum tenure for car loan could be anything between 1-3 years. Short-term repayment depends on the financial capacity of the borrower. Being able to pay high EMIs demands high income and if it is difficult, the borrower must never regard this option. If they can, it would mean high monthly EMIs till the loan tenure with high-interest rates. Let us go through the pros and cons of short-term loan tenure.
Short-term repayment entails a huge degree of pressure on the borrower. Repayment without a single default is not easy. In case the borrower is not able to meet the payment timely they incur a penalty that further burdens the EMI, upsetting the monthly budgeting.
In the short term, lenders add maximum interest on the car loan. For example, on a loan amount of ₹10,00,000, with repayment tenure set for 24 months at 8% interest, the monthly EMI is ₹45,227 and the total interest will be ₹85,454.
Though the EMI figure is frightening for those not earning enough, for those who can, it allows them to go debt free faster, giving them greater freedom. After the car loan is repaid, they can apply for another loan or go for an investment.
Some lenders attach discounts on early repayment for those paying back faster and can make car loans available at reduced interest rates. However, this solely depends on the lender and those offering the same may have more clauses in the fine print. Carefully read the terms and conditions.
The financial risk in short-term car loans is huge. Unless you are completely sure of the repayment capacity avoid this option. It is better to go for long-term loan repayment and make pre-payments from time to time. If the opportunity of disposable surplus cash arises you can also make a foreclosure. However, if you are unable to repay the short-term loan in the scheduled period, your debts keep adding to every missed payment.
Car loans are for a maximum period of 84 months or 7 years. Therefore, repayment must happen within this short span. Some like the shorter term.
Buying a car is often your first significant financial commitment. It is like taking the first step towards a happy and prosperous life. But getting your hands on a flashy new set of wheels can be tough if you do not have enough savings to buy one outright. So, if you are facing such a situation, a car loan might be of great help. Before making any move towards purchasing a new car, you need to thoroughly research and know how to get the best deal on car loans. Understand here the basics of this loan and make your car loan application fast and easy.
Basic eligibility criteria for a Car Loan
Documents required for Car Loan
After knowing the eligibility, the next important thing to know and understand is the documentation. To make sure that your loan application is processed smoothly by the banks, it is necessary to provide the following documents:
A valid identity proof- (Any one of the following)
A valid age proof- (Any one of the following)
Income proof- (Any one of the following)
For Salaried individuals
For Self-employed individuals
Signature verification – To ensure your signature is unique, a signature verification proof is required.
Recent photographs – Two copies of passport-sized photographs.
Things to check while applying for car loans
Car brand and model- The bank sanctions loan amount only on the approved brand and car models. So, it becomes important for you to check everything related to your car before going for car loans.
Rate of interest – Unlike other secured financing options, car loans are offered at a low rate of interest. However, the rate of interest depends upon the borrower’s profile, loan tenure, and the amount of loan. The higher your credit score, the better will be your eligibility.
EMI amount– The EMIs that you need to pay every month is decided based on loan tenure, loan amount, and the interest rate. Knowing about the EMI payments in advance will help you to assess your loan affordability.
Repayment tenure- Typically, a borrower can choose a car loan repayment period of 1 to 7 years based on his/her repayment ability. The repayment tenure can also be extended in certain cases which is totally upon the bank’s discretion.
Down payment- It is best to pay a full loan amount as the down payment to reduce your loan burden. The more time you will take to repay your loan, the higher will be the loan amount. Also, you will end up paying unnecessary interest rates that will make your loan cost high.
Important factors to consider while choosing a Car Loan
Here are a few factors that you need to consider while availing a car loan for the first time:
Choose a shorter loan repayment tenure – A shorter loan tenure ensures the complete loan repayment faster, resulting in lower interest cost. Therefore, it is always recommended to choose a shorter loan repayment tenure
Know your EMI repayment ability- In car loans, one can repay the loan in easy EMIs every month. To calculate the monthly expenses on your car loan, you can make use of an online car loan EMI calculator to know the estimate. Doing so will help you to set up your budget accordingly without hampering it.
Associated services and charges – Other than processing fees, several other charges are levied by the bank on your car loans such as pre-closure/foreclosure charges, stamp duty charges, late payment fees, and part payment charges. These charges may vary from one bank to another which can increase the overall cost of your loan. Hence, checking all of them beforehand becomes important.
Car Loan application process
A car loan application process is very simple and convenient. You can easily apply for the same online or offline according to your convenience. Applying it online will be the easiest way to reduce the hassles of visiting a bank branch. To file your car loan application, you just need to visit your preferred bank’s official website or through any Fintech portal. The steps that are involved in the filing of application and approval of car loan are as follows:
Check your credit score - A credit score is a very important aspect of the car loan. If you are applying for a car loan, check your credit score would be the first step. This is because the banks are willing to offer the loan only to such individuals who have a good credit score.
Fill up the application form: In the next step, you need to fill up your loan application form and submit it along with the desired documents. Make sure that the form is duly filled, and you provide all authentic documents.
Application verification- In the third step, your documents and credit profile will be verified to evaluate your eligibility. If you are found to be eligible your loan application will be processed in less time.
Loan approval- After verification is completed, usually banks will take 1 to 5 days to approve your car loan. Though, this period might vary from bank to bank depending on the borrower’s credit profile.
Disbursal of the loan- After your loan gets approved, the loan amount will be disbursed either to your bank account or directly to the car dealer with whom you will be buying the car.
Tips to pick the Car Loan at a low-interest rate
Shop around for the best rate- To get the maximum benefit of the car loan offers and discount, you need to do thorough research by comparing the multiple banks and car loan offers and then picking up the best one.
Keep a check on your credit score- Tracking your credit score and report frequently is important if you want to avail the best offer on your car loan. If you have a good credit score, your chances of loan approval are more likely to become high.
Car Loans are offered by all major banks in India and as it is secured by the car, the interest rate offered is lower than that of unsecured loans such as personal loans. However, there are other costs though small, that add-up to increase the overall costs.
There are costs like document charges, processing fees, and GST on that processing fees and so on. To give you a sense of how much you will pay, here is the list of Car Loan Interest Rates and Processing Fees of some leading banks in India:
Before you even take a car loan you need to arrange the down payment. Most banks give you 80% to 90% of the car’s on-road price as a loan. This means you need to pay 10% to 20% from your own pocket at the time of purchasing the car. So if you take a loan for a car with an on-road price of Rs. 12 lakh, you will have to make a down payment of Rs. 1.2 lakh to Rs. 2.4 lakh.
Now, as we said earlier, the interest on a Car Loan is the primary cost that you incur over and above the cost of the car itself. The interest amount you will end up paying in total depends on the loan amount, interest, and loan tenure. Most banks today offer car loans with a tenure of up to 5 years, however, some lenders offer Car Loan tenure of up to 7 years.
To understand how much more money you end up paying, let’s take the example of a car whose on-road price is Rs. 12 lakh. You decide to pay 10% as a down payment and take a car loan for the remaining amount at 8%. So you will pay Rs. 1.2 lakh as an upfront payment and Rs. 10.8 lakh will be the loan amount. Here is how much extra you will end up paying for 5 and 7-year tenure.
As you can see, over the 5 or 7-year loan tenure, a Car Loan is quite expensive. You end up paying an extra 20% to 30% of the car value as interest and other charges.
Also notice that opting for the longer tenure substantially increases your interest cost even though the individual EMI payments seem low. What’s more, unlike a Home Loan or an Education Loan, there are no tax benefits when you pay off a Car Loan. Now let’s consider the alternative to taking a car loan.
Also Read: Buying A Car Vs Hiring Ola/Uber Everywhere: Which Is More Economical?
Getting a car loan to buy the car today itself might seem like a good idea especially considering that you get instant access to the vehicle. But delaying your purchase and buying it using savings created for the specific purpose of buying a car can be a smarter choice.
Let us explain this with an example. Let’s say you decide not to take the loan to buy the Rs. 12 lakh car and opt to wait for 5 years. Now, you invest the Rs. 1.2 lakh you had kept aside as down payment. Since you want the money in 5 years, you go for Aggressive Hybrid Funds as they provide some cushion from market volatility. Assuming a conservative 10% return on your investment in the next 5 years, here is what your amount will look like.
Now that your original Rs. 1.2 lakh investment has grown to Rs. 1.97 lakh, the amount that you need to purchase the Rs.12 lakh car has decreased to Rs. 10.03 lakh.
Next, instead of paying an EMI of Rs. 20,276 for the next 5 years, you opt to invest the same amount i.e. Rs.20,000 every month by a SIP. Assuming the same 10% average annual returns, your corpus at end of 5 years will look something like this:
Based on the above calculations, your total savings to buy a car will be:
As you can see, it is possible to save an amount that is substantially larger than your target amount of Rs. 12 lakh. With Rs. 17.55 lakh at your disposal, you can purchase the premium variant of your chosen car or an even better one. All it will take to achieve this is disciplined investing and a bit of patience on your part.
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