The 10 most important things to consider before taking out a car loan
Buying a new car is on your wish list? Financing a new car is easy if your creditworthiness and income meet the funding criteria. You should choose your car loan wisely as it can make a huge difference to your lending experience and help you save money. Would you like to know what you should consider before taking out a car loan?
Let’s look at the top 10 tips to follow when getting a car loan.
The interest rate on a car loan varies between 6.75% and 9% pa. Factors that determine the interest rate on a car loan include, but are not limited to, your creditworthiness, your income, the term of the loan, the vehicle category/model, the down payment, etc. If you want to get the lowest interest rate offer, you should compare all available car loan offers online and contact the best lenders that offer loans at the lowest interest rate. Lenders offer auto loans with both variable and fixed rate options. If the market development indicates rising interest rates, you can opt for a fixed-rate loan.
Check your credit score before applying for a loan
A better credit rating can help you get a car loan at an attractive interest rate. So before you apply for a car loan, you have to check it yourself. If your credit score is off-brand, you can take corrective action to improve your score. Paying off your existing loans and lowering your credit utilization ratio can help improve your credit score. Once your credit score improves to a reasonable level, you can apply for a loan.
Decision about the right loan term
A longer loan term can help you pay lower EMIs, but you’ll have to pay more interest on your total loan amount. If you’re comfortable paying higher EMIs, consider opting for a shorter tenure. Typically, lenders allow up to 7 years to repay a car loan. A longer term is appropriate for borrowers who find it difficult to repay higher EMIs or for those who need lower EMIs to fit within the bank’s borrowing standards.
Fees Applicable to the Loan
Some lenders charge lower interest rates on car loans but may charge higher processing fees and other car loan-related fees. So you may end up paying more fees than you save if you choose a car loan because of its lower interest rate. Choose lenders that charge minimum fees along with a lower interest rate.
Want to pay off a car loan earlier than your car loan term? Beware, your lender may charge prepayment fees if you prepay or pre-arrange your car loan! When choosing your car lender, check ahead of time whether they charge a prepayment or prepayment penalty. Go to a lender that charges the lowest penalty for prepaying the car loan.
Services and Processing Time
Applying for a car loan should be easier with minimal documentation. You should be able to access your loan details online and get banking services online on your loan account. All of these play an important role when planning to apply for a car loan. Some lenders may process your loan in minutes while others may take days to approve the loan. After the loan has been processed, you may need the lender’s assistance from time to time for services such as loan statements and facilities such as online banking, etc. Loan repayment takes several years. You want these years to go as smoothly as possible. So, go to a lender that best meets your customer service needs.
Loan amount eligibility and deposit required
Creditworthiness and down payment requirements may vary from lender to lender. Choose the car lender that matches the down payment amount that is convenient for you and whose eligibility standards are easy for you to comply with. Some lenders even finance 100% of the car price in some cases, while others finance much less.
Read the fine print of the loan agreement carefully
Sometimes the car loan looks very tempting when you apply for it, but later you can end up with the wrong loan product. If you want to avoid such a situation, read the fine print of the loan agreement carefully. How often does the lender adjust the interest rate? What are the fees for your loan? Read all the essential details carefully so that you are not surprised later.
Alternative to car loan
Sometimes people don’t meet banks’ criteria for car loans. There’s no need to get excited because you might still have some alternative options up your sleeve. You can examine loan options like loans against stocks, FDs, loans against gold and other secured loan options to arrange the money to buy a car.
Check the car company’s bond with the lender
Before taking out the car loan, check with the car company if they have an exclusive relationship with lending institutions. Car companies and banks often tie in by offering loans for certain car models at attractive interest rates and favorable conditions. Under such an arrangement, you may receive benefits such as a lower interest rate, no processing fees, faster car loan processing, etc.
(The author is CEO, BankBazaar.com)