A loan you take from a bank for the specific purpose of buying a car is a car loan or auto loan. A car loan could be used to buy a brand new car or a used car. A car loan is a secured loan because the lender holds the car as security until the loan is fully repaid. This is known as hypothecation to the bank or finance company. Once the borrower pays off the full loan amount, including interest, the complete ownership of the car is legally transferred from the lender to the customer. However, if the customer defaults on the loan, the lender can repossess the car to recover their dues.
You need to be a minimum of 21 years of age to apply for a car loan.
What factors do lenders look at when you apply for a car loan?
Lenders are primarily interested in your income and credit history. They will look at your
1.Salary and employment status: Lenders need to know that you will have a steady monthly income in order to make your repayments. The repayments on your auto loan can carry on for a few years so lenders want to be assured that you will have a stable source of income. Ensure that you have had stable employment for at least a year before you apply for a car loan.
2.Your existing EMI burden: Your monthly EMI outflow should not exceed a certain percentage of your net monthly income. Lenders want to be assured that you have enough income to take on repayments on this new loan.
3.Credit score: Lenders get a good idea of your repayment record with your credit score. In general, if you have a score of 750 or above you stand a good chance of being approved for a car loan. It is possible to get a loan with a lower score, but you will be subject to stricter repayment conditions like, for example, a higher interest rate.
4.Credit Report: Lenders will access your credit report to see if you have a good track record of making your loan repayments on time, and to also check your current loan obligations, to judge if you can afford an additional loan repayment.
There are a multitude of banks and other financial institutions that offer car loans. Research the various offers online and check which one suits your requirements in terms of interest rates, loan period and loan amount.
If you are planning to apply for a car loan, the first thing you should do is to obtain your credit report and check your credit score. Make sure that you have a good credit score before you apply for a loan to avoid rejection. This will give you enough time to improve your credit score, if necessary, and avoid damage to your credit history.