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Introduction

Owning a car, whether a hatchback or an SUV, a manual transmission or auto drive, diesel version or petrol; these things are easy to decide as you have a lot of resources online. However, deciding the best lender with the most affordable car loan is the real challenge. India has 100s of lenders offering various car loan products that give you enticing features. But one must be prudent and weigh in all the factors before choosing the right lender.

Buying a car is a dream for many families. So a lot of thought and consideration goes in before the purchase is made. Though it is easy to find a suitable car for your family, it takes more work to find the best lender for your car loan.

A car loan is a financing option available through a bank or an NBFC to buy a new car or a used Car loans can be availed to buy any kind of passenger car models like a sedan, hatchback, jeep, SUV or MUV. Car loans are secured loans where the purchased vehicle is hypothecated to the bank till the loan is repaid. Hence it doesn’t need any separate collateral or guarantee.

Car loans were usually processed by popular banks and NBFCs. These days, car loans are available directly through financing options from the vehicle dealer itself. They have tie ups with various financial organisations that offer you low cost financing options to buy your dream car.

Whether you get your car loan from a bank or an NBFC, or even through the dealer, there are a number of factors that you need to keep in mind to get the best interest rate and attractive loan terms.

This article attempts to enumerate some of the important points concerning car loans!

Car Loans – A Snapshot

Features

New Car Loan

Used Car Loan

Interest rates

~ 7.25% - 14.00%

~ 10.00% - 18.00%

Loan tenure

Up to 7 years

Up to 5 years

Processing fee

Starting from 0.20% of the loan amount

Up to 2% of the loan amount

Loan amount

Up to 100% of the ex-showroom price

Up to 80% of the car’s valuation

Prepayment charges

0.5% - 5% on principal outstanding or interest outstanding for unexpired period of loan, whichever is lower

Car Loan Interest Rates at Leading Banks

Bank Name

Interest Rates

EMI per Rs. 1 lakh for 7 Years

Axis Bank

8.50% - 11.25%

Rs. 1,584 - Rs. 1,725

Bank Of Baroda

7.35% - 9.10%

Rs. 1,526 - Rs. 1,614

Bank of Maharashtra

7.70% - 8.45%

Rs. 1,544 - Rs. 1,581

Canara Bank

7.30% - 9.90%

Rs. 1,524 - Rs. 1,655

Central Bank of India

7.25% - 7.50%

Rs. 1,522 - Rs. 1,534

Corporation Bank

7.40% - 7.50%

Rs. 1,529 - Rs. 1,534

HDFC Bank

8.80% – 10.00%

Rs. 1,599 - Rs. 1,660

ICICI Bank

8.82% - 12.75%

Rs. 1,600 - Rs. 1,806

IDBI Bank

8.40% - 9.00%

Rs. 1,579 - Rs. 1,609

Indian Bank

8.20% - 8.55%

Rs. 1,569 - Rs. 1,586

Union Bank Of India

7.40% - 7.50%

Rs. 1,529 - Rs. 1,534

Punjab National Bank

9.40% - 9.90%

Rs. 1,629 - Rs. 1,655

State Bank of India

7.95% - 8.70%

Rs. 1,556 - Rs. 1,594

UCO Bank

7.70% - 9.30%

Rs. 1,544 - Rs. 1,624

Bank of India

7.35% - 7.95%

Rs. 1,526 - Rs. 1,556

Eligibility Criteria for Car Loans

Though the eligibility criteria differ from bank to bank, these are the most common eligibility criteria required for a car loan

  • Should be aged between 18 years and 75 years
  • Should have a minimum net monthly income of Rs. 20,000
  • Employment history of at least one year with the current employer
  • Must be a salaried or self-employed individual

What are the documents required for a car loan application?

These are the most common documents requested by most banks to process your car loan application:

  • Application form
  • KYC documents
  • Photographs
  • Identity Proof
  • Address Proof
  • Bank Statements
  • Income Proof
  • Latest Salary Slip / Form 16
  • Income Tax returns of 2 previous financial years along with complete financial/audit report
  • Business Stability proof / Ownership proof
  • Employment Stability Proof
  • Partnership deed and Letter signed by all partners authorising one partner
  • Companies and Societies: Resolution by Board of Directors (or such managing body)
  • Memorandum and Articles of Association

Factors Affecting Car Loan Interest rates

The bank doesn't give every borrower the same interest rate. Car loan interest rates differ on the basis of a few factors, such as age, income, employer, credit score, etc. Here is a look at the most significant factors that impact the interest rates for your car loan from a bank or NBFC:

Credit Score

Your credit report is a major factor in determining your car loan interest rate. A good credit score means that your history of repayment is good. Higher loan amounts and lower interest rates are guaranteed. A higher credit score is used by banks as an indication of the creditworthiness. This greatly changes the eligibility of your loan amount and your interest rate.

Income

A higher salary means that the debt is repaid on time. Banks offer better lending rates to persons with higher incomes. Banks still prefer salary earners over self-employed people, since wages mean that the account gets daily cash flow. However, self-employed professionals have an edge over salaried workers since they earn more than they do.

However, keep in mind that your income is just one of the several factors that influence car loan interest rates. Having a high debt to income ratio will have an adverse impact on the interest rate, despite having high incomes.

Your Age

The age of the borrower plays an important role during the car loan application process. The younger the creditor, the greater the number of years he would have to repay the loan. Car loans will be made available to people who are 21 years of age. Unlike older candidates, loan sums and interest rates are very favourable for younger-generation applicants.

The Loan Tenure You Choose

Longer loan tenures have higher interest rates since they pose considerable risk to the lender. So, choose a tenure that will get you the best interest rate.

Vehicle Model and Age

In the event of a car loan, the vehicle will serve as collateral. In the event of not getting the EMIs, the bank or NBFC will seize the car. The model and age of the vehicle are then weighed when setting interest rates. New cars from a reputable manufacturer have lower interest rates relative to older models. Used cars often come with high interest rates as the value of the car depreciates with age.

Type of Employment & Employer

Employment with a reputable company would certainly get you a decent deal on interest rates on your Car Loan. In authorizing the loan, several banks have a list of accredited employers and reputable bodies to which they refer. Employment in these companies guarantee the security of work and the flow of income to bankers. You are also allowed to seek an offer of higher car loan amounts and lower interest rates.

Relationship with the lender

Preference is often extended to bank clients with a long-term relationship, relying on the fact that their credit record is easier to view. If you are an existing customer of the bank, the bank will be able to review your account history, any recent credit or credit card charges and your general financial status. Therefore, on deposits, the committed customer is granted preferential interest rates.

Adding a co-applicant

If you have another earning member of the family, you can add them to the loan as a co-applicant so that their income is also taken into account while processing your application for car loans. If both of your income is entered, the result is a higher repayment potential and thus a lower interest rate.

Amount of down payment

While banks give you up to 100% of the vehicle's ex-showroom cost as a loan value, if you can make a higher down payment, you can negotiate better interest rates. Higher down payments mean lower debt balances and greater repayment potential. Banks are actively searching for low-cost lending consumers to reduce their default credit risk. So when you offer a higher down payment, you have a shot at having a lower interest rate.

Existing liabilities and investments

Last but not least, your current loans and obligations play an important part in assessing the eligibility of your car loan and interest rates. If you have current obligations, the repayment potential would be limited. This is perceived to be a high risk plan for the lender. It would also place more pressures on the cash flow. Therefore, an individual with a very low or no current liability is a preferred candidate for any bank.

How to negotiate for the best car loan interest rates with your lender?

Car Loans come with affordable interest rates and longer repayment tenures. There are a few factors one should consider before settling in for a Car Loan:

Be up to date with your Credit Score: As stated earlier, credit score plays an important role in getting the best loan terms. Higher the credit score, lower the interest rate. Know the different credit score ranges and the corresponding interest rates offered by the lender. This allows you to plan ahead and improve your credit score beforehand to take advantage of the best loan offers.

EMI Payments: Finding out the approximate monthly EMI for the expected loan amount gives clarity on your monthly budgeting. Your Car Loan EMI will include your principal and interest components. You can use CredtiMantri’s Car Loan EMI Calculator to determine the approximate monthly EMI so that you can determine your repayment affordability.

Cost of Car Insurance: It is a must to get annual car insurance for every car in India. Car Insurance premium is determined on various factors like the make, model and year of manufacturing of the vehicle. Car Insurance is a costly affair and you should find out beforehand the approximate annual car insurance premium so that you can get your finances in line.

Maintenance and Repairs: As some people joke, ‘A Car is a White Elephant’, meaning, it takes quite an amount of money for its regular maintenance and repairs. Find out the warranty and maintenance options available for your vehicle. You can negotiate for longer warranty or free maintenance offers with the dealer to reduce this particular burden.

Car Loan Foreclosure

Car loans are payable in equalised monthly payments (EMIs) before the completion of the repayment term. However, if you decide to pay off the remaining balance of the loan before the expiration of your term, you can either foreclose or prepay the loan.

Foreclosure/prepayment service is provided by most lenders with a penalty fee, but some lenders can encourage you to foreclose/prepay your car loan without charging any penalty. You may choose to foreclose your car loan if your salary has grown and you want to cover up your debt. It also eliminates the responsibility of having to make recurring contributions to the EMI. Foreclosing a car loan would release the hypothecation on your car and give you full ownership of it.

However, foreclosures can impose costs or penalties on the basis of the balance outstanding or the amount of EMIs remaining. Before applying for one, one can completely understand the foreclosure charges on their car loan. For if the foreclosure penalty is higher than the interest you pay by not foreclosing it, it is easier to remain on the debt.

Top-up Car Loans

One may have to face some kind of emergency for which they need some urgent funds. If you have a current car loan, you can opt to get a top-up car loan. The extra fund may be used for reasons such as weddings, house repairs, medical emergencies, etc. Any banks & NBFCs offer top-up car loans of up to 150% of the value of the car as a top-up loan. Many lenders providing a top-up on their car loans would enable you to keep a consistent record of payment for at least 9 months. The method of making use of a top-up credit on a current car loan is fast and needs minimum paperwork.

Car Refinancing

If you take a new loan to pay off the remaining debt on your previous car loan, it is known as Car Refinancing. You may opt to refinance your car loan if you want to opt for a new loan with improved features such as reduced interest rates, longer maturity periods, etc., or merely adjust the terms of your current loan. The most popular reason people refinance their car loans is to save money. You will use a new lender to refinance a car loan that provides cheaper interest rates, which in turn can save you money. You may also reduce the equalised monthly instalments (EMIs) by selecting a longer loan period with a new lender by car refinancing.

Car refinancing is a smart option because interest rates have fallen since you took the initial car loan, the financial situation has changed, you can't take the pressure of high EMIs, and if you like you haven't found a good offer on your car loan for the first time around. However, refinancing on a car loan may not make sense because you have already made a significant repayment on your initial loan, your car valuation has depreciated, the fees for prepayment are heavy, and when you have plans to apply for new loans in the future as refinancing will adversely affect your credit score.

Car Loan from a Bank Vs Car Loan from an NBFC

Financing Through a Bank

Bank lending includes going straight to a bank to obtain a car loan. Banks offer a range of deals and discounts to current customers. The lender will give you a quote and a letter of agreement that you will give to the dealer, saving you some time to finalize the contract. Getting a definite approved loan number on paper may also prevent the car salesperson from attempting to force you to include add-ons that you don't need.

You may apply for pre-approval online or at a local branch, depending on the bank. You will need to include specifics about the car, which may cause any delays if you're not yet sure what you want.

The bank offer would be the real interest rate which will not have any markup that may happen when you work with a dealer. In general, however, the rate quote you get is not a final bid. When you go to the dealership to buy a vehicle, the lender can do a hard credit check and review your full credit record once you accept your application and decide your loan amount.

One thing to bear in mind is that your choices may vary based on whether you are purchasing a new or used car. Some banks have caps on vehicle age and mileage, and new cars can qualify for lower interest rates in general.

Getting a loan directly from the dealer

Dealer-arranged lending functions the same way as bank financing—the only exception is that the dealer does the job on your behalf. When you pick your car, the dealer will make you fill out a loan application, which they will apply to various lenders. This helps you to compare prices and conditions in order to find the right choice for you.

In certain situations, though, a dealer can agree to a higher interest rate with you than that negotiated by the lender and take the difference as repayment for the handling of the financing. In other words, you do not have all the details you need to make the right decision.

Usually, you can get cheaper interest rates on a new vehicle from a dealer than on a used car. In reality, some dealers can provide promotional financing for brand-new vehicles, including very low interest rates and other free add-ons.

A particular type of dealer financing exists where the dealership offers in-house financing. Usually, they tend to deal with people with bad or no credit. But the risk and down payment conditions for these loans are high, and there is also a higher chance of recovery.

Car Loan Interest Rates FAQs

1. What is a Car Loan EMI? How is it calculated?

EMIs or Equated Monthly Instalments relate to the monthly contributions you make to the lender in order to repay the car loan. Such payments include both the principal sum and the interest. The number of EMI you have to pay depends on the duration of your car loan. For longer periods of time, the repayment of the debt is distributed over a greater amount of years and the payments are lower, while for shorter periods, the instalments would be larger.

2. What is the highest amount of new car loan that I can avail?

The maximum amount of new car loan provided by most lenders is 80% to 90% of the car's on-road costs. This may vary depending on the brand and the variant of your preferred vehicle. Your salary is also a determinant of the full value of the loan you are eligible for. Many banks have a minimum income threshold that you must fulfil in order to get the loan accepted.

3. Which car models are funded by the regular car loans in India?

Almost all small to medium-sized cars, Sports Utility Vehicles (SUV) and Multi Utility Vehicles (MUV) are eligible for car loans available in India, unless otherwise stated. However, as noted above, refer to the loan brochure of the lender for exceptions to this regulation.

4. Do I need a collateral or personal guarantee while applying for a car loan?

Most car loan products available in India are secured loans, with the vehicle itself serving as the customary security. Most lenders in India would not insist on any guarantors; but, if your annual income does not fulfil the expected criteria, you will be expected to sign up to a co-applicant and/or guarantor.

5. What is the maximum tenure available for Car Loans?

Car Loans usually come with a tenure of 1 year to 7 years.

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