Top 7 Items You Ought to Know before Applying for an Automobile Loan

Everybody dreams of being independent, and one drives themselves around for errands. The luxury that comes with owning a car is phenomenal. It makes life much more accessible and comfortable as one can move with their schedule as compared to a train or bus schedule. However, financing this luxury dream needs some severe amount of cash depending on the vehicle brand one is looking for in the market. Are you short of a car and wish to buy a new or used vehicle? Almost all car showrooms have a bank representative to work out loan eligibility and details. Car being a depreciating asset, spending huge amount on it, that too with a loan is often a bad financial decision- but then we do buy cars on loan because owning a car brings with it lots of aspiration value and social status. Ever considered an automobile loan? If yes, there are things that you ought to consider before applying for a loan. They are as follows

1.      Eligibility
When contemplating an auto loan, you need to check if you are eligible to apply for one. Some of the fundamental requirements include age, employment type, minimum salary requirements as well as down payment you can afford.

Mandatory documents to accompany your loan application letter include an identity proof such as a driving license, permanent account number, or a passport. There has to be proof of location address such as a passport or voters identify cars.

Some lenders require income proof such as 6 or so monthly salary slip, latest income tax return statement, or 3-month salary bank statement.

Other lenders go a notch higher and ask for a vehicle insurance copy as well as driver’s license before agreeing to your application. Some ask for a credit score to check if you are a defaulter. 
2.      Loan amount
Once your eligibility for the loan is confirmed, next task for the financier is to decide how much loan amount they can grant you at max. This is again a function of which car model you've shortlisted and how much you can afford to pay upfront. Some banks like SBI may offer auto loans on 100% of on road price (with lots of riders) but often financiers fund 60-80% of ex-showroom price and expect you to cover rest of the amount required to get the car on the road (Ex-showroom Price+ Registration+Insurance+ accessories + dealer's handling charges etc)

If you are young, you might qualify for a larger amount by extending repayment tenure. Or if you can afford a higher EMI, banks/car loan providers will be happy to loan more. In your own interest, stay within your means and don't stretch too much.

However, when applying for a loan on a used car, so many costs including registration fees aren’t covered

3.      Hypothecation
When you purchase an automotive through means of an investment, it becomes hypothecated to the car loan lender. It offers the lender the right to seize any asset in case one fails to pay the EMI on time. Banks/lenders often keep one of the original keys of the car/vehicle with them for this purpose.

Hypothecation letter is an integral part of the automotive registration procedure papers. Upon paying all the EMIs, ensure you get NOC from lender, get your second original key back and ensure complete ownership transfer.

4.      Interest rate charged
An automobile money lender will charge a particular interest rate as the marginal cost of funds based on the lending rate plus and additional spread. The interest rate is generally fixed. It thus makes loan repayment quite easy without worrying about the increase in the EMIs at a future date.

Taking a loan on a used automotive tends to be quite expensive compared to a brand new automotive. Many car sellers have their own finance arms- Like Mahindra Finance. Do check for such tie-ups where you might save a % or half on the interest rate.

5. Down-payment and Calculation trick- 
Don't trust the calculations shown to you. Do the math yourself once and see if you're satisfied. 

Here's a simple example:
Assume Car's value is INR 10 Lakh, you're putting 4 lakh up front and taking loan for 6 lakh.
Pay attention to how interest is calculated- in your opinion, loan amount is 6 lakhs, so interest should be calculated on 6 lakh- but most financiers consider loan amount as 10 lakh with 4 lakh down payment and calculate interest on entire 10 lakh, without you as customer realizing it.

6.      Repayments
Upon loan approval, the next cause of action is how the loan gets repaid. Some automotive loan lenders will stretch their repayment period between one and seven years. It's always crucial to choose a convenient repayment period that will work for you rather than strain your budget.

7.      Watch-outs
There’re no tax benefits on having an automotive loan

New models arrive in showrooms every week. So take a few more more if required, but be sure to
buy a right car that suits your budget, requirements and aspirations, than regret your decision few
months down the line.

Cars depreciate fast. It is better to buy a smaller/cheaper car in your budget, sell it and upgrade to a \
better one in future when your financials improve, than stretching your budget now, buying an
expensive car that drains your salary and expensive to maintain.

Remember to bargain hard, read online reviews, compare rates on sites like bankbazaar before
making a final decision

Conclusion

Applying for an auto loan is quite easy as it requires less documentation. The loan becomes secured against the automotive, and there's no additional collateral compared to a home loan. Always remember to choose a loan that will not over-stretch your budget.

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