Like each year, the ongoing festive season is expected to witness an increase in demand for car purchases. Many households must have been eagerly waiting for the festive season to own their dream vehicle. However, before hurrying onto the decision to purchase a car, make sure you adopt these 6 power points:
Make sure you have chosen the right vehicle Factors such as size of your family, frequency of usage, estimated maintenance cost etc. must be taken into consideration while zeroing on a particular car and its model. For instance, if you require the vehicle for daily commute to your workplace and often go on road trips as well, make sure the chosen car has a higher mileage. Make sure you have sufficiently accumulated the down payment
While lending a car loan, most lenders offer up to 85-90 percent LTV (Loan to value) ratio, implying that borrowers would be required to fund about 10-15 percent of the vehicles cost from their own pocket.
Even though some lenders have been providing up to 100 percent funding either on the vehicle’s on road price or ex-showroom price, it’s advisable for borrowers to still fund some portion of the cost themselves. The more you fund from your own pocket, the lesser you would need to borrow and repay, along with the car loan’s interest, which usually ranges from 8.8-16 percent per annum.
Investing in mutual funds through SIP (Systematic Investment Plans) is a convenient and effective way to accumulate sufficient down payment amount, according to the expected LTV ratio and cost of car.
Check loan eligibility and credit score to avoid loan rejection
Borrowers are often left disheartened when their loan applications get rejected by the lender, even if they have sufficiently accumulated down payment amount for the car. Therefore, it’s prudent to check your loan eligibility as well as credit score before submitting your loan application.
Availability of online loan eligibility calculator and free credit report on various online financial marketplaces assists the potential borrowers to check their eligibility beforehand, and therefore avoid unexpected loan rejections in the later stages. A higher credit score would certainly boost the chances of your car loan approval.
Do not limit your research to a specific type of lender
In your pursuit to find the right lender for your car’s finance, make sure you do not restrict your research only to a specific type/segment of lenders. Borrowers often prefer taking loan from a bank with whom they have an existing relationship, and in process end up ignoring other types of lenders, which may probably have a better deal according to their requirements.
Apart from banks, make sure you research offers and deals provided by other types of dealer finance companies, NBFCs and captive car finance companies as well. While purchasing car through such dealers, make sure you procure the performance invoice from them, as it would assist in smoother financing of car loan.
Compare lenders on various parameters
Before zeroing in on any lender, make sure you do not restrict your comparison to just the interest rates offered by them. Instead, compare them on other vital parameters such as processing fees, loan tenure, LTV ratio, prepayment charges etc.
During the festive season, most lenders try to lure potential car loan borrowers by providing attractive deals, offers and discounts, such as zero processing fee, 100 percent financing and quicker loan disbursals. In such scenarios, it’s vital for borrowers to act with due diligence and read and understand the terms and conditions thoroughly, before giving in on such offers.
Limit your DTI ratio up to 40-50 percent
While availing car loan, it’s important for borrowers not to overlook their debt to income ratio (DTI). This ratio reflects the proportion of your income currently being spent on debt repayments, such as loan EMIs or credit card bills. A higher debt to income ratio signifies that a higher proportion of your monthly income is being spent on these credit repayments, implying lesser room to manage savings and expenses, investments or take another loan or credit card, if the need arises.
You can make use of online EMI calculator tools available on various online financial marketplaces, to ensure that your DTI ratio does not breach the 40-50 percent mark, after taking into consideration the expected monthly EMIs of car loan.
Remember that borrowers having higher DTI ratio are usually considered more likely to default in future, due to the presence of higher debt repayment burden. Lenders may hence, hesitate to lend them, or may lend at higher interest rate.
Sahil Arora is Head of Payment Product,