Having received a promotion at work and a hike in the paycheck, you plan to celebrate the success by buying your first car! With no debts and a decent take-home pay, you decide to opt for a car loan. However, since this is your first loan, it is obvious to be a bit confused about the various parameters you should be considering before finalizing your car loan. Let us have a look at 5 important factors that you should consider before you opt for your car loan.
- Credit Score and Eligibility:
Before applying for any loan, one should make sure to have a clean credit history. You should also make sure, you fulfill all eligibility criteria. Banks decide on extending a loan taking into consideration the monthly take-home salary for salaried professionals and annual income for self-employed. With increasing number of defaulters, banks are more cautious before they approve any loan. Additionally, they may ask for past few years’ income tax returns for self-employed individuals before considering an approval for the loan. So before you apply for a loan, check your credit score. A poor credit score may lead to higher rates of interest and on few instances, rejection of the loan. Sometimes, you might find your credit score to be low with no fault or default from your end. This could possibly happen if you have applied for a credit card and have never used it, which could show it as a default in your credit score. For any such discrepancies, contact your concerned bank to get the error rectified before you apply for your car loan.
- Down Payment and Tenure of loan:
Banks expect 15% to 20% of the total loan amount as a down payment. The higher the down payment, the lesser is the amount taken over a loan. With lesser down payment, you may save up on some liquid cash at the moment but would eventually pay up on the installments.
Look for the tenure you would wish to take your loan for. The cost of the loan remains the same regardless of the amount taken as the loan or the term the loan applied for. Rather, the absolute amount of interest depending on the loan term and amount.
- Processing Fee:
The processing fee is determined differently by different banks. Certain banks have a flat loan processing fee while others calculate the processing fee on a certain percentage depending on the loan amount. Few banks charge some amount extra as late payment charges in case of any equal monthly installments missed. So while you compare the processing charges of the bank when applying for a loan, look for such late payment charges included.
- Foreclosure charges:
Cars are one of the depreciating assets. Hence, many look for pre-paying the loans for such assets. So if you have some extra cash left with you after you have purchased a car on loan, and wish to pay off the loan before its tenure, make sure you look at the pre-payment charges that various banks apply. Few banks have no foreclosure charges, however, most others charge somewhere 3% to 5% for foreclosure of loans. Also, be aware of the sub-conditions associated with a foreclosure of loans. Many banks make it a mandate of no foreclosure of a loan within the first year of the loan tenure.
- A rate of interest:
Though loans make our lives simpler when we look for buying luxury items like cars, it is very important for one to compare the rates of interest offered by various banks. Also, consider the affordability of the equal monthly installments that you need to pay before you plunge to buy your car with a loan.
Most car dealers attract buyers by pre-approved car loans which might make it easy for the buyer during the purchase, however, most of the cases such deals cost more than individual car loans. Nevertheless, loans make it much easier to purchase any luxury item. So if you are planning to buy one this season, look out for offers from banks such as waive off the processing fee on the loan! Drive home your dream!