Often, one of the first loans that people take is an auto or car loan. There are a variety of auto loans on offer on the market today that suit all needs and levels of affordability.
Car loans can be taken to purchase both new and used cars. The interest rate on loans for new cars is lower than the interest rate charged for buying a used car. The general range for interest rates on car loans is between 12-15% though this might be higher or lower, depending on the individual bank and broader market conditions.
The interest rate on car loans is usually a fixed interest rate – meaning you pay one rate for the entire tenure of the loan. Many banks give loans for up to 100% of the invoice value of the new car, and a little less for used cars. However, when calculating how much interest you will be paying, you also need to keep in mind that you will have other expenses like registration charges, insurance and processing fees on the loan among others.
It is simple to calculate the interest you need to pay for your car loan and what your EMI will be. Most banks and lenders have online tools that help you calculate how much your car loan will cost you. You need to input your loan amount, loan period and interest rate and you will learn your interest costs immediately.
Many people think that when they buy a car on loan, it belongs to them from the start. This is not the case! The lender holds the vehicle in hypothecation as security till the entire loan, including interest, is repaid. Thus, the lender technically owns the car until you repay the whole amount due. If you fail to make your loan payments, the lender can repossess the car and dispose of it to recover their money.
Very often, the interest rate that the bank charges you on the loan is determined by your credit score. The higher your credit score is, the lower the interest rate you will be offered. If you have a good credit score (750 or above), it signifies that you are a responsible borrower who repays on time, and therefore a low-risk customer. Banks are willing to offer you attractive rates of interest as they are reassured that there is a low chance that you will default on the loan.
If you are planning to apply for a car loan and wish to avail of a lower interest rate, make sure you obtain your credit report and check your credit score. If your score is below 750, then it is a good idea to improve your score before applying for a car loan. It is possible to get a loan with a credit score of less than 750, but you will be offered poor terms and conditions including a higher interest rate, smaller loan amount and shorter repayment period.
If you need to improve your credit score when applying for a loan, you could approach a professional credit management agency like CreditMantri who will guide you on how to increase your credit score in the most efficient way and help you find the best car loan that suits your needs and affordability.