auto credit: Buying a car this holiday season? Consider These Factors When Comparing Car Loans
However, not everyone spends a lot of time researching and comparing auto finance programs. You should consider these factors when choosing a finance plan before purchasing a car this Diwali.
For anyone in a hurry to buy a car, this option is convenient as the dealership arranges the financing on their own without the buyer having to run for a loan. Most car dealerships have relationships with lenders and offer auto loans to buyers at the time of car purchase in the showroom itself.
But there are a few things you need to consider before choosing this option, one of them being that the dealership may not have connections with all the banks. “The only benefit of getting a car loan through the dealership is the slight convenience. Dealers tend to push the customer to their captive financial services or to banks where they get higher commissions. So when a customer compares the dealer’s offer with more banks or online marketplaces, they will usually find lower interest rates and better terms than those offered by the car dealership, ”says Gaurav. Gupta, CEO of MyLoanCare.in, an online lending marketplace.
Click here to use our auto credit EMI calculator
Interest rate on the loan
One of the most important parameters to check is the offered interest rate. Lenders offer interest rates in two variations – fixed or floating rate and fixed or declining rate.
Fixed or variable interest rate: In the case of banks, both fixed and floating interest rates are tied to its marginal cost of funds (MCLR) based lending rate. “Fixed rates are better for those who want security of interest payments. On the other hand, variable rates are better in case the rates should drop in the future. Typically, a bank only offers ‘only one type of rate,’ Gupta explains.
While most banks offer a standard rate to all borrowers, Bank of Baroda is the only lender to offer rates based on the borrower’s CIBIL office score (i.e. credit score). with a minimum threshold of 725.
Flat rate or declining interest rate: When choosing between a fixed rate and a declining rate, you should not fall for the former simply because it is listed at a lower rate. Gupta explains, “Some captive finance companies of automakers, NBFCs, and dealerships sometimes offer flat rates. A flat rate of 5.64% is equivalent to reducing the rate by 10% in terms of interest expense for the customer. So be careful not to compare the flat rate with the declining rate. ”
In the flat rate method, the interest rate is calculated on the total amount of the loan for the duration of the mandate, without taking into account the principal repayments made by equal monthly installments (IME). In the reduction method, since the principal is paid monthly, interest is only charged on the principal amount outstanding.
Costs and fees
After the interest rate, the important factor to take into account the following month are the charges and fees that are added to the loan.
Processing fee: Most lenders will charge a processing fee as a percentage of the loan amount, which is typically around 0.5% plus tax. In order to gain market share, some lenders may also give it up.
Documentation costs: In addition to the processing fee, lenders may require borrowers to pay a documentation fee of up to Rs. 300 to Rs 600 per loan basis.
Partial prepayment and seizure costs: Making a partial prepayment, in addition to the IMEs, for the loan is something lenders discourage. They therefore come with a prepayment penalty or fees. Most lenders ask for a penalty of almost 5% plus applicable taxes, of the prepayment amount or foreclosure before the original loan term.
Some lenders may waive these fees on sanctioned loans especially during the holiday season. Few people can put conditions on prepayments and foreclosure by setting a minimum amount or an amount equal to an EMI and a maximum amount of 25 percent of the principal overdue in a year. Please read the general conditions carefully.
These two parameters should not be neglected.
Loan on ex-showroom price or on the road
The ex-showroom price includes the cost of the manufacturer, the dealer margin and the cost of transportation. For each make and model of car, this price may vary from city to city, but within the city it will be largely the same at different dealerships. Sometimes dealers may give a discount off the showroom price. Lenders typically offer financing for 95-100% of the showroom price.
However, this is not the only cost when buying a car and taking it out of the showroom. The car must be registered with the transport office and you must also insure it.
The cost of registration, road tax and insurance are added to the ex-showroom price and the result is known as the road price. Most lenders finance up to 85% of that road price.
The difference in loan-to-value ratios between the on-road price and the non-showroom price could be 10% or more.
Choosing the right tenure is important
Generally, auto loans have a repayment term of 12 to 84 months. And generally, borrowers are tempted to choose a longer term because EMIs are lower than for a loan with a shorter term. However, keep in mind that the period is longer, but the greater the total interest expense.
So, on a loan of Rs 5 lakh, you could end up paying Rs 1.86,000 as interest on 84 months of seniority, while it will be around Rs 130,000 over 60 months of seniority. You end up paying Rs 56,000 or 40% more in total interest. (See below)
If you go for financing from a dealer, be sure to read the terms and conditions before signing on the dotted line. Some lenders may offer a partial prepayment facility only to salaried persons and not to professions and businessmen. And, if you intend to pay off the entire loan within a few years, make sure there are no prepayment charges or foreclosures in the loan agreement.