A Helping Hand - Car loans
Everything that you always wanted to know about car loans but could not ask. Our expert breaks every jargon down for you.
By Keshari Kishore Singh
For most of our lives, we were terrified to take our father’s car out for a drive. One dent and we were dead, or worse, a long lecture on how he bought it from his limited resources. Not that we don’t care for our cars, but as a seasoned banker (and falling into your father’s age group), I can say that it is easier to buy a car now than it was two decades ago. The magic word is car loan. It is now easier, quicker and hassle-free to apply for a loan, receive the sum and get your hands on your dream car.
There is one issue though. The problem of plenty. There are too many financial institutions (read banks, Non-Banking Financial Companies, personal lenders etc) offering loan, albeit with a shrinking font size for 'terms and conditions' column, making it a risky affair.
So, before you get all confused and dizzy with the flow of information available online and offline, we will highlight the catch points of car loan schemes that will come handy.
Eligibility and Quantum
Employees of central and state government, professionals, self-employed, businessmen and farmers with a regular source of income are eligible for a car loan. The quantum of loan is fixed based on the annual income of the eligible person. Usually, if the take-home salary/income of the borrower is between 40 to 50 percent (generally 50 percent) after paying all liabilities, including the car loan installments per month, it is considered ideal. The income of co-borrowers, if any, is clubbed for ascertaining the quantum of loan.
The loan is available for new as well as used/ second-hand car. For used/ second-hand cars, certification by an approved valuer or automobile engineers is required.
The margin money or down payment, i.e. the contribution of a proposed borrower is generally stipulated at 15 percent of the total loan amount. While it is the minimum contribution, you may contribute more to reduce the loan burden.
There may be an unsaid war to grab eyeballs, but financial institutions never let a borrower get away with an eyewash. They take care of the risk perception involved in loan repayment by tracking the creditworthiness of the borrower. They take into consideration your CIBIL score (Credit Information Bureau India Limited score), which is calculated based on your financial history, such as credit history and loan repayment. A month-on-month data on bill payment and EMI for a period of three years is available with the bureau.
The general range of score is between 300 and 900, and 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.
Rate of Interest
Banks and NBFCs decide their own rate of interest on loans. A virtual cold war over interest rate always lurks, and so is the need to lure more borrowers.
The rate can be either fixed or floating (changing with a base rate of the financial institutions). In India, usually, a fixed rate is offered. The rate charged from women beneficiaries is generally low. Besides interest, there are other charges too, such as processing fee that can vary from one financing institution to the other.
But, an early repayment of the loan is not a good news. A pre-payment penalty is charged in case the borrower approaches to liquidate the entire loan before the due date.
The loan balance can be transferred from one bank to another on request, if you are being offered a lower interest rate. And if you plan to do so, take a few pointers into account: the entire cost that includes pre-payment penalty from the existing bank, processing fee and other charges by the new bank. More often than not, takeover depends on the internal policy of the concerned bank.
Security & Repayment
The period for repaying the loan may range from 12 months to 84 months, depending on the repaying capacity of the borrower. You may opt shorter repayment period as per surplus fund available with you, but in no case the take home salary/income is allowed to be diluted. Normally EMI (Equated Monthly Installment) once fixed is not changed during the entire tenure of the loan.
As regards to the security of loan, the car bought from the loan is the primary security. The charge of the financier over car bought out of such loan is created by hypothecating that car itself (through hypothecation agreement executed by the borrower).
Generally, no additional security (collateral security) is insisted upon by the financial institutions in case of a car loan. However, for high value loan, additional security in the form of a pledge of term deposit receipt, National Saving Certificate (NSC) or mortgage of land or a building can be stipulated by some financial institutions.
The car bought from the loan remains compulsorily registered jointly with the borrower and the financing institution and continue till the loan is repayed.
You might be a great saver and would rather like to buy your car without getting into the hassle of loans. But, buying a car from a personal fund may put you on the income tax radar. So, a loan is better. And if you really have handsome savings, invest them wisely for better returns. But, that’s a subject for another time.
Never misunderstood car as an investment even if it is an expensive purchase. Simply put, a car is an investment without returns, unless you are investing in vintage cars that can give you returns, only if you would like to sell it. Also, these rare beauties are high maintenance. A car, essentially is a consumer good, with a depreciating value.
And before you sign those dotted lines, as they say, read all scheme related documents carefully. Drive safe!
Keshari Kishore Singh, an independent banking and micro-financing consultant, is a seasoned banker with an experience of over three decades of working with Allahabad Bank.