Things You Want to Know Before Taking a Car Loan

Most private vehicles bought in India are on borrowed finance. Barely anyone waits to accumulate enough money for a dream vehicle unless maybe if it is their second new vehicle bought after selling their first. The last thing manufacturers and dealers want is a potential customer not approaching or even worse walking away for lack of sufficient funds. If you are planning on buying an automobile on loan you have the option of getting your car or bike purchase facilitated by the manufacturer or dealer themselves, banks, financial institutions or credit unions.

Know how much you can afford

If you're reading this probably you already have done the homework regarding manufacturer, model and price of your dream vehicle. Maybe you've finalized the exact model you want to buy. But we want you to know that thanks to the skills of the sales guys in automobile showrooms very few people stick to what they'd researched in websites and magazines and go in for costlier and 'better' variants. If you found the base price variant flaunted in advertisements in some showroom you'd be lucky; it's almost as though they exist only in ads.

Even before you start dreaming of a particular model get a hang of how much money your pockets can comfortably afford every month. As a general thumb rule we advise that your vehicle must cost no more than 40-50% of your annual income. Your total long term debt including home loan, vehicle loan and student loan, if any, must not exceed 50% of your monthly income. Even if you don't have a home loan as of now, if you intend to purchase a home in a few years you must allocate around 35% of your monthly income towards it so not more than 15% of monthly income should go towards car loan EMIs. Fuel is no longer cheap. With the EMIs consider fuel price, insurance and maintenance charges too. To stretch it a little all vehicle related expenses must fit in the 15% bracket. These things will ensure your financial life is not thrown out of gear and you also have enough to spend on eating out, holidays and so on from time to time.

What vehicle is best for you

Don't go the way most people do- deciding on the car first and then work out EMIs possible for them, which often leads to over-stretching the budget. Set your budget first and then zero in on the type of car you want to buy. This depends on how the vehicle will be used most frequently. If you are single and not staying with your family and will mostly use the vehicle for commuting to work over not very long distance consider buying a two wheeler instead of a car.

Take into account factors like where the vehicle will be driven most frequently, if it will be used for long drives or if the purpose is to drop the kids to school (in which case you need a spacious vehicle).

For a first time buyer graduating from two-wheeler a used car may do well enough for using around two years. Buying a used car can involve traps unless you bought it from organized players. Plenty of organized players exist in the market who can assure you of the quality of used vehicles. Tata Motors Assured, Mahindra First Choice, Hyundai Advantage, Maruti True Value are some of them. However interest rate on loans for used cars is much higher so opt for one if you can shell out the amount or at least a good chunk of it from the pocket.

How to get the best auto loan

You can approach the dealer first and choose a lender from among the ones he has tie-ups with or alternately you can first choose the lender and select a dealer from the host of ones the lender suggests. It is great idea to approach the lender first and get a good deal on the financing part. The lender can even help you select a vehicle within your budget and give comparative details of manufacturers and models. Usually dealers have vehicles of a single brand and they will pitch about a particular vehicle being the only good thing suiting your budget and matching your need.  

When you are at the lender's ask them details about interest rate applicable, margin money required to be paid, processing fee, foreclosure fee, turnaround time, documents to be submitted along with application. About 15-20% of the cost will be required to pay upfront. If you can afford to pay more, do so by every means and decrease your loan amount. Owing to intense competition among dealers and lenders loan approval time ranges from 4 hours to 4 days. Unless credit history is terribly ugly rejection is not made. Once the loan is approved it is delivered depending on the availability of the specified car with the dealer.

You can expect the lender to ask for documents like identity proof, address proof, income proof, signature proof, bank statements and post-dated cheques. Once these are submitted and verified the approved loan is disbursed in 24 hours.

Mistakes to avoid while buying a car

1. Buying accessories from the dealer

A good deal of profits on car sales is generated from after-sale add-ons sold. Dealers want you to drive off their lots spending thousands more for additional services, insurance policies and extended warranties which are meant to boost their income. Even if some of those things would be useful you could actually buy them from outside the dealership from lesser money.   

Extended Warranty is an extension of the new vehicle standard warranty offered by the manufacturer for a given number of years or given distance driven by the car. The dealer replaces or repairs damaged parts in the period of damage. But only a small percentage of buyers actually use the warranty. There are exclusions on several parts and usage. Don't buy this unless your vehicle is prone to getting damaged due to frequent long drives or simply postpone buying the warranty.

The dealer may try to sell other 'protection packages' like rustproofing, fabric sealant, paint sealant, alarm system, etc. All of these must be skipped because they are not really worth what you will pay the dealer. Some of them can be purchased much cheap from outside while others may actually void the manufacturer's warranty. Most new cars have alarm systems installed but additional security systems may prove useful to a niche segment of people like a jewelry businessman who carries samples in his car.

2. Wrong decision on cash rebate and low interest-rate

Dealers often woo potential customers with cash rebate or alternately low interest rate loan. The dealer will let you choose between the two. A cash rebate lowers the overall price of the car because the manufacturer 'pays' for some of the purchase. Low interest rate or some time zero interest loans work only for those who have good credit history. Before you decide on the two, figure out which one will lower your overall car expense and whether you would really qualify for the zero interest financing.

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