A loan you take from a bank for the specific purpose of buying a car is a car loan. The loan could be used to buy a brand new car or a used car. A car loan is a secured loan in that 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 you pay off the full loan amount, including interest, the complete ownership of the car will be legally transferred to you. However, in case of default on the loan, the car can be repossessed by the lender.
You need to be a minimum of 21 years of age to apply for a car loan.
What is the amount and period of a car loan?
In general, lenders can give up to 90% of the invoice value of the vehicle. Some lenders offer even 100% financing on certain brands and models of cars. The invoice value does not include the additional costs incurred when you buy a vehicle such as taxes or insurance. The invoice value refers only to the price of the vehicle.
The tenure – or loan period - on a car loan varies from 1-7 years. Again, lenders will decide the loan period based on your monthly income and ability to repay. Car loans have a shorter repayment period than home loans since the loan amount is relatively smaller.
What are the interest rates on a car loan?
Unlike home loans, car loans have fixed interest rates for the entire tenure of the loan. Your lender will fix a rate based on, among other factors, the type of vehicle or the loan amount. For instance, the interest rate on a loan for purchasing a luxury car will be lower than a compact car since the down payment made on a luxury car is far larger.
What are the factors lenders look at when sanctioning 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. Also, your existing repayment obligations should not exceed 50-60% of your monthly income.
2.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 and a higher interest rate.
3.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.
If you are planning to buy a car with 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.