Car Loan:
Application Process
One of the first things
you need to look at while taking a car loan is the monthly installment,
popularly known as the Equated monthly installment (EMI). While different
banks would give you different quotes depending upon their rules and regulations,
you must compare your monthly outflow for the same amount and for the same
tenure. Remember that the effective interest rate is a function of the
reducing balance method being used to calculate it.
Reducing balance is the method
of reducing the principal amount being repaid, from the outstanding loan
amount. Every time you make a payment, the interest you pay is calculated
on balance outstanding principal. Different banks can use different methods
like:
Daily - In this method, the
principal is reduced every day as if you were making repayment of the principal
on a daily basis.
Monthly - In this method,
the principal on which you pay interest reduces every month, that is, when
you pay your EMI.
Quarterly - In this method,
even though you keep on paying you EMI, the principal reduces only every
three months.
Yearly - In this method,
the principal is reduced finally, at the end of each year. This effectively
implies that though you have paid back a part of the loan during the year,
the principal outstanding gets reduced only at the end of the year.
This simply means that the
earlier the principal reduction is done, the lower the amount you will
pay to the bank. Nowadays, almost all banks offer the daily reducing method
as it has more or less become a norm in the industry. However, it is better
that one is aware of such things while going for a car loan
Car Loan: Application Process
Once you have zeroed in
on the car that you want to purchase, the next step is to apply for a car
loan. There is a lot less paperwork involved than a home loan since the
bank does not have to verify any asset as in the case of home loans. It
takes about three to six days for you to get a car loan -a lot less time
than a home loan.
Here is a step-by-step break-up
of the car loan application process:
Step 1: Enquiry with a lender:
The first step is to get
in touch with a lender. You need to get in touch with as many lenders as
possible and get them to make loan offers to you. Then negotiate with them
to get the best interest rate. Check if there are any special offers.
After you have got all the
banks to make their offers to you, select your lender based on the information
you have in front of you.
Step 2: Documents Collection
After you finalize your lender,
the lender's direct selling agent will visit you and collect documents
supporting proof of income, residence proof, and identity. You may be required
to produce copies of IT returns, salary slips, bank statements, passport,
driving license, and other relevant documents. These requirements vary
from lender to lender.
Step 3: Field Investigation
Agency Representative Visit
After submitting the documents,
a field investigator will visit your home to double check the facts provided
in the documents, such as your place of residence, tenure at work place,
and so on. It is essential that you are present during this visit to clarify
any query that the investigator might have. Otherwise, the investigator
might not get all the facts clearly and could report that the facts you
provided do not actually add up - thus forcing the lender to reject your
loan application.
Step 4: Loan approved
Once the lender is satisfied
with the veracity of your documents, the loan is approved. The lender then
disburses the amount through cheques or demand drafts (DD).
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How much car loan can I get?
Banks provide car loans
based on the income of the individual. They normally provide loan amounts
that are up to 2.5- 3 times the annual salary for salaried professionals
or 6 times the annual income for self-employed professionals. Apart from
income, other factors that decide the maximum eligible amount are the car
model, the borrower's repayment track record, other existing loans, and
so on.
Banks finance 90-100% of
the ex-showroom price of a new car.
The maximum amount financed
for used cars vary from 80-90% of the car's value.
If your income is not sufficient
to get the loan amount that you want, you could club your spouse's or relative's
income along with yours to get a higher loan amount.
Processing fee for car loans
When you apply for any kind
of loan, be it a car loan or a home loan, the bank charges you some amount
of money (which is some per cent of the loan amount required) as processing
fee. This fee may vary from bank to bank. This amount, that needs to be
paid upfront, effectively reduces the money you get.
Let us take an example. If
the processing fee is say, 2 per cent and the loan amount you have applied
for is Rs 2,00,000, then the processing fee works out to Rs. 2000. So,
you will get Rs 1,98,000 in hand when the loan is sanctioned.
This fee is important for
one to consider, since banks charge different rates. This actually can
make a big difference on the real cost of the loan.
Car loan paperwork
Before you drive off in
that new car of yours, there are just a few papers that need to be signed.
These include the power of attorney which allows the dealer to go to the
RTO and register the vehicle for you and transfer of title if you are trading
in a vehicle.
Read each document carefully
for errors. Once you sign on the dotted line, the deal is done. If something
does not feel right, don't sign. Do not feel pressured or obligated to
sign just because of the amount of time invested by the salesperson.
Charges applicable before
and after a car loan disbursement
Very often we fail to read
the fine print in a loan document. The real cost of your car loan is visible
only when you factor in numerous other charges levied. If you intend to
make comparisons with other types of loans, it is necessary to take into
account these charges to arrive at the real cost. For example, the processing
fee or prepayment fee in the case of a car loan will be different from
that of a personal loan.
Here is a list of all charges
that are levied before a loan is disbursed, through the course of the loan,
or when you terminate the loan:
Description of Charges:
* Processing fee
* Prepayment fee
* Charges for late payment
* Cheque bounce charges
* Documentation charges
Processing fee:
The bank charges you an amount
as a processing fee. This fee may vary from bank to bank. The bank deducts
this amount from your loan before disbursal.
The processing fee is generally
a percentage of the loan amount and is between 0.1- 1% for car loans. Some
banks levy a flat charge of Rs 500- Rs 2000 upfront, and then deduct the
balance processing fee (if any) from the loan amount before disbursal.
This fee is important for
one to consider, since banks charge different rates. This actually can
make a difference on the real cost of the loan.
Pre-payment fee:
Most banks charge you a penalty
when you opt for the option of prepaying the loan amount. This prepayment
penalty is levied because when you prepay your loan, the bank loses income
in terms of interest.
Ideally, you should go for
a bank that does not charge you any prepayment penalty. In case there is
no such bank, you should go for the one that charges the least.
The prepayment fee varies
from bank to bank. It varies from 1% to 5% of the outstanding loan amount.
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Charges for late payment:
When the monthly installment
(EMI) towards repayment of a loan is delayed the bank collects the installment
along with late payment charges. The late payment charge is also known
as the late payment penalty.
This is chargeable if you
make the payment after the due date. Late payment fees range from 1% to
2% on the overdue amount.
Cheque Bounce Charges:
A cheque bounce is when
a cheque that has been presented for clearance is not honoured by the bank
because the amount written on the cheque exceeds the available balance
in the account. If you have given post-dated cheques to the bank to debit
the EMI from your account, ensure that you have sufficient funds in your
account every month. If a single cheque bounces, the bank charges anything
from Rs 200 to Rs 450 as penalties. |
Documentation charges:
Banks levy documentation
charges towards the verification of the various documents you provide towards
the loan application. The expense on this account is usually passed on
the customer, which range from Rs 250 to Rs 500.
Differences between motor
insurance policies
Motor Policy A: This insurance
policy covers personal injury and property damage caused by your car. The
parties covered under this include:
* Pedestrians, occupants
of other vehicles etc except those within your vehicle
* Driver of the other vehicle
* The passengers with whom
your vehicle is for hire. Here, the owner of the vehicle gets an insurance
cover on third party property damage only in case of an accident. In other
words, if you are in an accident, the affected party can claim damages
from you. The premiums generally are dependent on the cubic capacity of
the car.
This cover does not go to
fire and theft accidents, for which you need to pay additional premiums.
Motor Policy B: The premiums
of this "comprehensive insurance" are much higher than those paid for regular
insurance cover. This type of policy covers both third party insurance
and own damage liability. Covered under this policy are:
* Loss or damage to the vehicle
caused by environment as well as other reasons. That is, accident, fire,
explosion, lightning, theft and other malicious acts are covered under
this policy.
* Damage to the vehicle
while it is under transit.
* Risks due to natural/man-made
calamities like floods, earthquake, riots, strikes and terrorism.
* Damage to accessories
like car stereo, car AC and other items that are not part of the original
equipment.
Prepayment charges on auto
loans
Most banks would charge
you some prepayment penalty when you opt for the option of prepaying the
loan amount. This is penalty is levied because when you prepay your loan,
the bank is losing the interest income it would have got from you.
Ideally, you should go for
a bank that does not charge you any prepayment penalty, but in case there
is no bank that offers this facility, you should go for one that charges
the minimum.
The idea of prepayment arises
from the fact that you can get rid of your debt whenever your finances
improve. Also, it is a great way of reducing your interest cost. Moreover,
if there is another bank that is offering you a better rate (lower rate)
you can shift your loan to that lender.
In fact, many banks even
cap the amount (or a certain percentage) that you can prepay at one go.
That is, the bank may put a clause that if you pay more than 5 per cent
of the outstanding principal, you may attract a certain fee. This basically
implies that banks would like to discourage you from prepaying the loan,
as it results in a loss of interest income
With a never-ending stream of
automotive launches and a plethora of financing options to choose from,
it is now easier than ever before to buy a new car. Be warned, however:
your urge to buy also makes it easy for financial companies to fleece you.
Competition is fierce in the automotive market; be sure to use it to your
advantage.
Team-BHP shows you how to
get the best possible financing deal for your shiny new wheels:
1. Shop around: While this
advice seems obvious, it is often ignored: getting rates from several brokers
and car dealerships is the key to a good deal. If you intend to buy a Honda
in Mumbai, bargain with Ichibaan / Linkway / Arya and any others. When
you ask for your quote, tell the vendor that you intend to shop around
and be certain that they know you are serious about buying. Casual inquiries
take up a lot of time for dealers; an inquiry with good sales potential
will make them bend over backwards for you.
2. Negotiate: Many people
don't realize this, but if you want a great financing deal you will have
to negotiate for it. Negotiate hard. Pit at least three competing quotes
against each other and start bargaining with each vendor. You will be surprised
at how quickly the offered equalized monthly installment (EMI) payment
will drop in the course of an hour of simple bargaining. And its a LOT
of fun too!
3. Targets: Start negotiating
in the third week of the month. Most Indian agents have monthly targets
and generally save the best rates for last minute deals to fill their quota.
4. Other accounts with the
same institution: Leverage any existing relationship (credit cards, investments,
etc) that you have with your financial institution. Most banks will offer
a 1 - 2% discount based on the fact that you are already a known quantity
to them.
5. Do not take the interest
rate at face value: When your broker says that his great interest rate
has been calculated "just for you", you don't have to take his word for
it. Use any one of a number of online calculators to compare; chances are,
your broker is bluffing.
6. Manufacturer financing
plans: Some manufacturers offer financing plans that are less expensive
than broker or dealership options. For e.g. the Tata finance option.
7. Nationalised banks: Nationalised
banks like the State Bank of India have very competitive auto-loan packages
that usually offer the best rates and terms, especially if you have an
existing relationship with them. Meet with your branch manager for a quote.
8. Hidden fees: In today's
competitive market there is no such thing as a processing fee for a car
loan. Ask for an all-inclusive quote and check the fine print for hidden
charges. These miscellaneous fees can amount to thousands of rupees. You
will also see a difference in stamp duty charges etc. from one proposal
to the other.
9. Do NOT opt for ECS: Even
though automatic electronic withdrawal from your bank account is supposed
to make life easier, the system is not yet a 100% reliable in India. Make
your loan payments the old-fashioned way with cheques and read the Team-BHP
forum discussion on ECS for more details.
10. Be wary of unauthorised
dealerships: Even if you get a great financing offer, check to see who
will be delivering your car. Some Direct Sales Agents (DSAs) have connections
to unauthorised dealerships. These dealers often engage in shady practices
like supplying counterfeit spares and are generally not worth buying from.
11. Pre-payment penalties:
Some banks charge rates as high as 5% of the total loan amount if you pay
off your loan early. Check to see if your bank included a pre-payment penalty
in the contract and ask for a waiver / reduction if you intend to pay the
loan early.
12. Maintain a good credit
history: Financial institutions in India maintain a central database to
keep track of your credit history. It is essential to keep a clean credit
record by paying credit card bills and other loan EMIs on time
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