Financing your dream car: a guide to car loans

Our expert breaks down the nuances of car loans to help you make better and informed choices.

There was a time when owning a car was a luxury not everyone could afford to have one. With the change of times, growing demograhics, the growing economy, and emerging automotive financiers, the scenario has changed. Now purchasing a car is well within the reach for a majority of Indians because of vehicle loans. Rather, the purchase is no longer a luxury, but a necessity. Banks and Non Banking Financial Companies (NBFCs ) play a vital role in satisfying the growing needs of the majority of people by providing car loans. There is a cutthroat competition among these institutions to grab potential customers. They are using various measures to mobilise car loan proposals.

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Although one can find every detail of a given scheme on the website of these institutions, there are several things to consider, when availing the services that they offer.

1. Employees of central/state governments, professionals, and self-employed businessmen and farmers who have regular source of income, are all eligible for an autmotive loan.

2. The quantum of the loan is fixed, based on the annual income of the eligible person. But the financial institutions also consider the take home salary/ income of the proposed borrower which should be between 40 to 50 per cent, after paying all liabilities, including the loan instalments, every month. The income of co-borrowers, if any, is clubbed for ascertaining the quantum of the loan.

3. The loan is available for new as well as used or second hand cars. While financing used cars, proper certification by approved valuer/automobile dealers is required.

4. The margin money or down payment, i.e. the contribution of proposed borrower is generally stipulated at 15 per cent of the total loan amount. This 15 per cent or so is the minimum contribution. One may contribute even more to reduce the loan amount.

5. The repayment period may range from 12 months to 84 months depending upon the repaying capacity of the proposed borrower. One may opt for a shorter repayment period, as per any surplus fund that is made available with the borrower, but in no case is the take home income criteria allowed to be diluted. Normally, your Equated Monthly Instalment (EMI) once fixed, does not change during the entire tenure of the repayment tenure.

6. With regards to the security against the loaned amount, the car purchased is the primary security. The charge of the financier over car purchased using such loan is created by hypothecating the car itself through a Hypothecation Agreement executed by the proposed borrower. Generally no additional security or collateral security is needed by the financial institutions in case of a vehicle loan. However, on loans of high value, additional security in the form of a pledge of Term Deposit Receipt, National Saving Certificate (NSC) or mortgaging of property etc., may be required by some financial institutions.

The car purchased from the loan remains registered with the concerned Road Transport Authority, to the proposed borrower and financing institution, jointly, and continues throughout the tenure of the loan.

7. Banks/NBFCs decide their own rates of interest for loans.

An interest rate war prevails in the market, to attract more customers.

An interest rate war prevails in the market to attract more customers. The rate of interest is either fixed or floating. Fixed rate of interests mean the rate at which the interest is calculated remains fixed for the entire duration of the loan, whereas a floating rate of interest means the rate at which the interest is calculated, changes with the base rates of the financial institutions. In India, generally, fixed rate is the norm for vehicle loans.

So, while choosing your financier, it is imperative to analyse the interest rates, which are easily available on their websites. The rate charged from women beneficiaries is generally lower when compared to that of male beneficiaries.

8. Besides interest, other charges viz. processing fees and the likes are also charged by Banks/NBFCs. These charges vary from one financing institution to another.

9. Prepayment penalty is charged in case the borrower approaches to liquidate the entire loan before due date. Financial institutions are often flexible in fixing the prepayment penalty.

10. The loan balance may be transferred from one bank to another on the request of concerned loanee. The main consideration when applying for such a transfer is lower interest rate offered by other financial institutions. While deciding whether to transfer the loan balance from one bank to another, the entire cost should be taken into account by the respective borrowers as the original financier may charge prepayment penalties for transfering the loan and the new opted bank may charge processing and other charges for taking over the loan.

However, this process of taking over depends on the internal policies of the concerned banks.

11. Several banks offer festival specialities, by discounting various charges levied on the loan.

Although banks are aggressively marketing their car loan schemes, they also take care of the risk perception involved in loan repayment and to track the credit worthiness of the proposed borrower, banks and financial institutions use individual’s CIBIL (Credit Information Bureau India Limited score) score, which is calculated based on an individual’s financial history. Banks and financial institutions are required to send personal as well as related information of the proposed borrower to the credit bureau which in turn calculates the score and makes them available to the financial institutions. Based on this score, financial institutions take credit decisions. The range of score is 300 to 900. The preferred score is 750 and above. Car loan seekers may face either higher rate of interest or stipulation of additional security or even rejection of the loan proposal in case of low credit score. This tool is used by the financial institutions after receiving the loan proposal.

So, one can purchase a car of their choice, using their own savings or with the help of car loans, which are available in the market at competitive interest rates. However buying a car from own funds may put you on the radar of the Income Tax Department. So it is better to go with a car loan and use your surplus funds for some other productive purpose, like investing them in some other avenues to get better returns.

Never consider a car as an investment despite the fact that it is an expensive purchase.

Investment means that there should be some returns on the amount invested, which is not the case when it comes to a car. Yes, there exist some classic cars, which, if well maintained, might be valuable as an investment but the cost of maintenance of such cars is often high. A car is a consumer good, the value of which depreciates over time.

From the August–September 2018 issue of FHM India.