If you have decided to purchase your brand new car using a bank loan, you must consider a few vital factors. Loans are pretty common for people purchasing cars. Statistics reveal that more than 90 percent of people take car loans to purchase cars. It is much easier to take car loans today as there are numerous banks, car financing firms and financial organizations in the market. There is tremendous competition between these financial institutions so they are providing car loans with quite attractive interest rates and longer duration repayment opportunities for the borrowers. However, many of you are so thrilled at the idea of purchasing a car that often they forget or overlook some vital factors, and this often ends up in them taking a car loan that they simply can’t afford. Here are a few vital factors you need to consider before you apply for a car loan.
Eligibility and Credit History
Credit score certainly is a vital factor to consider while taking a car loan. The credit score is supposed to define a person’s loan repayment capacity. So a low credit score certainly would imply higher interest rate or less loan amount. You must examine your credit score before looking for a car loan.
You must have a really good credit history plus you must fulfill all eligibility criteria. Banks reject or approve loan applications depending on how good or bad your credit score is. Self-employed people would have to produce annual income certificate while salaried professionals would need to present monthly take-home salary. Self-employed people would also have to provide three years’ income tax returns.
Car Loan EMI Must Not Exceed Your Monthly Budget
It is quite natural to get thrilled at the idea of owning your dream vehicle on installments that are really a fraction of your car’s actual price. You must never forget to check out the affordability of the loan in terms of the EMI before taking the final plunge. You could be having some other active EMIs for education or home loans etc. Always check out the affordability issue before you decide to take the loan. You should be able to afford the EMI and make the necessary monthly payments every month.
Borrow Less and Only for a Short Term
If you borrow less, you would have to pay less in terms of interest. If you borrow more, you would obviously end up paying more interest. The shorter the term the lesser interest you need to pay during the loan term. However, the actual loan cost remains the same and is not affected by loan term or loan amount. The loan term or loan amount would be increasing the absolute interest amount. You could get car loans with a tenor of one up to seven years. Keep in mind that low loan amount implies that you are supposed to pay more out of your pocket. Shorter loan tenure implies higher EMI burden.
Examine the Interest Rates
You must, first of all, compare the car loan interest rates of diverse banks and other financial organizations. This is pretty important simply because no standard rates exist in the market. The car loan interest rate seems to vary from one bank to another and from flat to floating. Remember even slightest differences in the interest rates have the potential to make a lot of difference to the amount you ultimately repay the bank.
Banks and car financing firms often charge a processing fee for car loans. Processing fees could either be on a purely percentage basis or as just a flat fee. Processing fees for car loans differ from bank to bank. You must find out about the processing fees before you take a loan from any bank or car finance institutions.
You must remember to ask your bank about foreclosure penalty. Most buyers do not know about foreclosure penalty. Suppose you repay a bulk of your loan well in advance of the repayment period, a bank could be charging a foreclosure penalty on the loan amount remaining. Different banks impose different foreclosure penalty, so choose your bank wisely after much deliberation.
You must keep the above factors in mind in order to secure an auto loan without any difficulties. Remember to complete all the mandatory car loan formalities before buying the car loan. This would ensure that you have a truly enjoyable ride in your new car with absolutely no worries.