An auto loan is usually one of the first big loans individuals apply for from banks and other financial institutions. These loans are taken in order to fund the purchase a new or used car vehicle. The terms and conditions on an auto loan depend on various factors including your income, your credit score and history, your existing loan obligations and ability to repay.
What are the various kinds of auto loans?
An auto loan can be taken for new car, used car and two-wheelers. A loan taken for buying a commercial vehicle like a truck or bus is generally referred to as a commercial vehicle loan.
What is the amount and tenure?
An auto loan can be availed for up to 90% of the invoice value of the car. This amount can go up to 100% in some instances based on the make and brand of the car being bought. The invoice value refers to the showroom price and does not include the registration, insurance and other related costs.
The tenure on an auto loan varies from 1-7 years. Auto loans have a shorter repayment period than home loans since the loan amount is relatively smaller.
The interest rates are fixed for the period of the loan so you will have the same monthly outflow (or EMI) for the entire tenure of the loan. This helps with planning your personal budget and making all your payments.
An auto loan is a secured loan as it is offered to an individual with the purchased car used as collateral/security in case there is default on repayments. The vehicle is ‘hypothecated’ to the lender until the loan is paid off.
Once you pay off the loan in full, the bank transfers ownership of the vehicle to you. If you fail to repay your loan in full at the end of the loan period, the bank/lender can dispose of the vehicle to recover their dues.
Tips to keep in mind before you apply for an auto loan
Calculate your monthly income and expenses to make sure that you can pay your EMIs on time.
Obtain a copy of your credit report and check your credit score. If you have a score of 750 or above, you stand a good chance of being approved for an auto loan. If it is lower, improve your score before applying so that you avoid the chance of rejection and are also eligible for better terms and conditions including a lower interest rate, longer tenure or larger loan amount.
Find out if you have anything on your credit profile that needs to be fixed. Any negative information or errors can keep you from getting the loan approved.