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Keeping pace with the changing demands and maintaining a certain quality of life can be challenging. In this pursuit of life, having a car of their own is a wish that many people keep close to their hearts but might not be realizable without aid from financial products like a car loan. The available car finance facilities make it so that you don’t have to curb your wish of buying a car, whether it be for convenience, quality time with family, or just fulfilling a yearning of yours. Before diving deep into the mechanics of a car loan and how you can benefit from it, here is what it means.   

If someone does not have the resources of purchasing a car right away, they can opt for a car loan to finance the buy that will allow them to repay the loan in monthly installments. It is a common type of personal loan where you are basically borrowing the funds from a financial institution and paying it back through Equated Monthly Instalments (EMI) with interest over a specified period called the loan tenure. The forms in which car finance is offered to the consumers by Banks and Non-Banking Financial Companies are New Car loan, Used Car loan, and loan against car. The loan amount one gets varies from person to person depending on certain factors like their income, credit score, and many more.

New Car Loan

This type of loan is available for the purchase of brand new cars, which since being worth more than older models, helps facilitate the negotiation of competitive interest rates. For most models of cars in the market, a new car loan is available. The interest rate at which new car loans are offered is 9-14% p.a for a loan tenure ranging from 1 to 7 years. 

Used Car Loan

Another type of loan is a used car loan used for the purchase of cars that don’t qualify for a new car loan due to being too old as they have been pre-owned or used for less than 5 years. It contracts an interest rate higher than its counterpart of around 12-18% p.a for a loan tenure of 1-5 years owing to the car’s decreased worth. The loan offered by financial institutions can be up to 80-85% of the car price.

Loan against Car

Another way via which one can fund the purchase of their new car is by pledging their old car as the collateral, also known as a loan against car. The interest rate can range from anywhere between 14-15% p.a. for a loan tenure of 1 to 3 years where the loan amount offered can be up to Rs. 10 Lakh or 100% value of the car. 

Car Loan Refinance

Car loan refinancing is one option that allows you to replace your existing loan with a new one from another lender. Since you are taking the trouble of replacing the loan, it must have its own merits. The loan features, benefits, and terms will get renewed when you choose to go for financing. It can prove to be beneficial for lowering interest rates, modifying your loan tenure, changing the loan terms, and modifications to a co-signer agreement. The key points associated with refinancing that one should consider are:

  1. You will be required to make prepayment charges which depending on the lender can range from 1% to 3%. 
  2. Loans of older cars are harder to refinance due to the depreciated value.
  3. One will incur additional charges like processing fees and other charges.
  4. Assess the reliability of the lender and whether they offer dependable services.
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Commercial Car loan 

This type of loan is offered to organizations, partnership firms, and self-employed individuals, and is availed by borrowers to purchase commercial vehicles like buses, trucks, and tankers to be used for business purposes. Most of the leading and prominent banks in India provide commercial car loans at low interest with fast and easy documentation and approval. There are three types of commercial car loan – a New Commercial Loan for the purchase of new commercial vehicles for business purposes, an old commercial vehicle loan offered for the purchase of pre-owned or used commercial vehicles, and commercial vehicle refinancing wherein the bank offers a loan on a loan-free existing vehicle or provide additional finance on an existing commercial vehicle loan. 

Car Loan Features

For choosing the most suitable car loan offer, it is imperative to understand the features which constitute a car loan. 

Car Loan Amount

It will vary depending upon whether the car you want to purchase is new or old. For the former case, the loan amount would be higher, while the latter case will warrant a lesser loan amount due to decreased worth. Loans offered by banks for a new car can be up to 85-100% of the car price, but on the other hand, an old car will draw a car loan of only up to 70-80% of the car price. 

Car Loan Tenure

Loan tenure is the time period specified to the borrowers by the lender for the repayment with the applicable interest, which is determined based on the age of the car and the loan amount. You can go for either short or long loan tenure depending upon how much you are comfortable in paying as EMI and until when.   

Car Loan Interest Rate

Over the chosen loan tenure, you will incur interest on the principal loan amount payable every month. It will vary according to the bank you choose, so searching for the best offers can reap you some benefits.

Down Payment

In some cases, you might be expected to make an upfront payment of a certain amount wherein you only have to borrow a loan amounting to the balance price of the car. This initial amount payment via cash, demand draft, cheque, and electronic transfer is called the down payment. 

Car Loan EMI

Equated Monthly Installments or EMI are how your car loan is repaid to the bank. The amount that one will be paying as the EMI is dependent on the loan amount and loan tenure. A loan of shorter tenure will recruit a higher EMI in comparison to a long tenure loan. 

Processing Fee

A small amount of the principal is charged as the processing fee by the banks to process a car loan. sometimes, the processing fee can be waived off as a part of a special offer by some banks. 

Prepayment/Preclosure

One will contract a prepayment fee, some percentage of prepayment amount if they wish to prepay a part of the car loan after making 12 EMI payments. Preclosure is when you pay the loan amount in full before the end of the loan tenure. 

Foreclosure

In case you were to default on your car loan, your car pledged as the collateral will be repossessed by the bank, which can then put it up for auction to compensate for outstanding dues.  

Eligibility Criteria

The eligibility criteria can vary depending on the bank.

  1. The required minimum and maximum age of the applicant should be 18 years and 60 years, respectively. For self-employed applicants, the maximum age is extended up to 65 years.
  2. The applicant should either be salaried or self-employed.
  3. The minimum income of the applicant for availing a car loan should be 1.0 Lakh to 2.5 Lakhs per annum, depending upon the bank from where you are taking the loan.
  4. According to some banks, one must have continuous employment of at least 2 years with their current employer, while some may need you to have 2 years of work experience with 1 year of continuous employment with your current employer. For a self-employed individual, the minimum amount earned or the turnover of the company should be around 3-5 lakhs. They should have been in the business for at least 3 years. 

Documents Required

  1. Aadhaar card, PAN card, Driving License, Passport, and Voter Id are required as identity proof. Additional documents like the utility bill and life insurance policy are required as address proof.
  2. For salaried individuals, the required document as income proof is a salary slip, whereas income tax returns for up to 2 years as income proof of self-employed individuals is required. An audited balance sheet, along with a profit-loss statement is also needed as income proof for self-employed individuals.
  3. Updated bank statements of the last 3 to 6 months are one of the documents required.
  4. For age proof, the birth certificate and school mark sheet need to be presented while availing of a car loan. 
  5. Another document is a Proforma invoice, which is the price quoted by a dealer for the car of the applicant’s choice. 
  6. If you are self-employed, you will be required to present office address proof, maintenance bill, utility bill, and copy of business registration license to prove that your business is in operation. 
  7. To prove the signature of the applicant, most banks have separate forms.

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