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A Detailed Insight into Car Loan

Purchase of car for personal use is normally financed through one of the 3 ways, namely -

  • Hundred percent through own fund
  • Partly through own fund and partly through loans
  • Hundred percent through loan

Out of these, the Point No. 1 is now of rare occurrence and Point No. 3 is mostly common in employer-financed car purchase for their employees and some banks also advertise up to 100% financing with (*) mark followed by a note in small - almost invisible letters that says - T&C applies

The most common mode of car-purchase financing is mentioned in Point No.2 - partly through own fund and partly through loan. Loan for purchase of cars - commonly termed as car loan in India, are offered by some banks and non-banking financing companies

After you take a car loan, a cheque for the loaned amount is drawn in favor of the dealer of the car and is issued to the dealer by the finance company on behalf of the borrower. And the car, in return is, hypothecated to the financer. This hypothecation is recorded with the RTO and with the insurance company. This is withdrawn after completion of the repayment of the loan through a letter issued by the financer.

Amount of car loans sanctioned by financing companies are usually to the tune of 85% to 90% of the ex-sales room price of the cars. Remaining 15% to 10% is to be paid by borrower of the loan who is also the purchaser of the car. Expenditure towards fee for registration of car, road tax, and insurance cost and the incidental cost (usually not accounted for by the dealer) are normally excluded in car loan and have to be borne by the purchaser through his own fund in addition to the 10%-15% of the ex-sales room price of the car

Factors to Consider While Taking Car Loan

  • Interest rate - The interest rate charged for the car loan in India varies from time to time and bank to bank particularly during the period of change of rate of interest. Interest rate charged by banking and non-banking financial companies for the car loan could be different. Thus, it is important to check out car loan quotes offered by different financers. You will find many online car loan quote comparison tools that will let you compare car loan quotes (new as well as used car loan quotes) from major financing companies and banks.
  • Car loan EMI is the most important part in loan repayment process and assessing the liabilities in car purchase by taking a car loan. EMI multiplied by the loan prepayment period in months is the liabilities generated through a loan and that is what directly affects the borrower.

How is EMI Calculated?

Car loan EMI is usually calculated on the basis of what is known as monthly reducing rate and this is what is advantageous to the borrower. But certain financing companies adopt half yearly or even yearly reducing rate in calculating EMI on car loan - which is disadvantageous to the borrower. Most financing companies advertise lower yearly interest rate to attract customer but the borrower eventually ends up with paying more EMI because of their method of calculation of EMI. Borrower cannot even complain as he should have thought of the consequences earlier

In other words, what concerns a borrower is total amount to be repaid [=X] through EMI [=E] for fixed amount of loan [=A] for total period [=T] of loan repayment.

The total interest paid [=I] for loan amount [A] paid through EMI [E] for total repayment period [T] can be expressed as

Total amount to be paid as loan repayment in rupees = X = E * T

Total amount to be paid as Interest for a loan amount during repayment period = I= X - A

  • Service and handling or processing charge - It is a one-time fee charged by the financing companies of both types. Different companies charge different amounts - some companies even give special offers.
  • Loan repayment capability - It is another point to evaluate before deciding about the amount of car loan. There are no set rules to ascertain one's repayment capabilities. It is absolutely a personal matter to decide about expected increase in monthly income and short term curtailment of nonessential expenditure, monthly savings if essential.
  • Time limit for repayment of loan through Equated Monthly Installments (EMI) - It is usually either 36 months or 60 months.

Documents Needed to Take Car Loan

Documents needed for car loan are identity proof, address proof and proof of the loan repayment capability of the borrower - generally the proof of income. Besides banks and non-banking financing companies have their own system of assessing each and every applicant for loan through a system of procedures known as verification - one of those could be through phone call from a personnel of the verification department to the prospective borrower.

Before you zero in on the car loan deal read the agreement deed properly - Agreement deal is the agreement between finance company and the borrower. The contents of these deeds vary from financing companies to financing companies and printed contents in the agreement forms cannot be changed, it is advisable that borrower gets copy of deed to be signed along with the quotations for checking and comparing the contents before making decisions.

How is Payment of EMI Done?

The payment of EMI is done through number of post dated cheques - issued in the name of the financer - signed by the borrower. Post-dated cheques if bounced due to insufficient funds in the bank account of the borrower can be a case that financer can use against the borrower as issue of cheque without sufficient fund is an offence.

In certain cases, if agreed to by the financer, the borrower instead of issuing post-dated cheque pays EMIs through a standing instruction to his bank. In such cases also financer may protect himself by taking few cheques from borrower.

It is always advisable take certain precautions against possibility of arising unforeseen reason or act resulting in non-payment of EMI.