You should never settle for anything in your life. So, there is no reason why it should be any different when it comes to buying a new car. The question is- how do you arrange money for an expensive car? Well, an affordable auto loan is a good option but you have to be careful.
The following are some of the most important things to keep in mind when applying for car loans:
Interest Rates Comparison
It’s important to remember that there is no standard interest rate that’s followed by all banks and financial institutions. Each lender sets their own rate for different types of loans. Since even a single percentage can make a huge difference in the loan repayment, it’s highly recommended that you compare the interest rates in the market and shortlist the banks that are offering the lowest rates.
For a bank to approve a loan, they have to follow the KYC norms (Know Your Customer) which are basically the various steps to verify the identity and financial status of a borrower. In this, you have to submit certain documents including a photo ID, income tax returns of the past 3 years, PAN card, income proof, etc.
Before you go about applying for loans, make sure that you have all the documents ready with you. You don’t want to get a loan approved only to find out later that you lack a document or two for the loan process to complete successfully.
Most banks check the credit report of the loan applicants whether it’s a home loan or a car loan. It’s essentially one of the most important financial documents that tell the bank about a customer’s financial status. The details include their personal information like name and address, past loans, repayment history, current loans, income status, etc.
Your credit report which is usually the CIBIL report also contains your credit score. This score represents your creditworthiness i.e. how worthy you are to be granted credit. Naturally, if your score is high, you can get an auto loan easily. However, if your score is low, then you can face some challenges in getting a bank on your side to approve the loan.
A car loan, just like most loans isn’t just about the principal amount and interest. There are all kinds of fees involved which can increase your financial burden to a great extent. For instance, there is a non-refundable loan processing fee which is around 2% or a flat amount of Rs. 5,000 to Rs. 6,000. Then there are various small charges such as handling charges, service charges, NOC to convert from private to commercial and commercial to private registration, etc.
When you are looking around for a car loan, then be sure to ask the lenders whether there are prepayment charges involved. If a car loan comes with prepayment charges, then it means that if you took the loan and in a few years, decide to repay the entire remaining amount in a single payment (i.e. earlier than the actual day when the term is supposed to be over), then you will have to pay a fine for that.
It goes without saying that you should look for a loan that won’t slap prepayment charges and give you flexibility with the loan’s repayment.
What’s a good term length for an auto loan?
Now that you are aware of all the important concepts of car loans, let’s address the central question which is “how long should your auto loan term be?”
Most experts recommend keeping your car loan term length limited to 3-4 years. In fact, the shorter term you can be comfortable with, the better. This is because the math behind it is simple- the longer is the term, the more amount you have to pay in the form of interest. That said, you shouldn’t pressurize yourself to opt for a short term because the EMIs also become bigger when the term is shorter. So, what you want to do is find the perfect sweet spot.
There is no standard “good term length”. It varies from one individual to another. Good luck!
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