Festive season is the time banks and non-banking finance companies (NBFCs) announce attractive offers like lower interest rates on car and home loans, waiver of processing fees, cashback and more. This is a big reason why many people make big-ticket purchases like buying a car during the festive season of Diwali and Dhanteras.
If you are considering opting for a festive season offer to buy a car, then here are a few important factors to look at when comparing car loans.
Financing through dealer
Here the dealer arranges the financing on its own for the buyer. Most car dealers have tie-ups with lenders and offer car loans to buyers at the time of buying the car in the showroom.
Even though this is a convenient option, you still have to take a few things into account. One of them being the fact that the dealer might not have tie-ups with all banks. Experts say that dealers tend to push the customer towards their captive finance arms or towards banks where they get higher commissions. So, if you compare the offer from the dealer with more banks or at online marketplaces, you could end up finding lower rates.
Interest rate on the car loan
One of the most important parameters to check is the interest rate being offered on the car loan. Lenders offer interest rates in two variations.
Also read: Best car loan interest rate 2023: SBI vs HDFC Bank vs ICICI Bank vs PNB vs Canara Bank
Fixed or floating interest rate: In case of banks, both fixed and floating interest rates are linked to its marginal cost of funds based lending rate (MCLR). Fixed rates are better for those who want certainty in interest payment. On the other hand, floating rates are better in case the rates are expected to come down in the future. Typically, one bank offers only one type of rate.
Flat or reducing interest rate: Some captive finance companies of car manufacturers, NBFCs and dealers quote flat rates at times. A flat rate of 5.64% is the same as reducing rate of 10% in terms of interest outgo for the customer. So, be careful not to compare flat rate with reducing rate.
In the flat rate method, the interest rate is calculated on the full loan amount for the entire tenure, without taking into account the principal repayments done through equated monthly instalments (EMIs). In the reducing method, as principal gets paid each month, the interest is charged only on the outstanding principal amount.
Charges and fees
After the interest rate, the next most important factor to look at it are the charges and fees that are added to the car loan.
Processing fees: Most lenders will ask for a processing fee as a percentage on the loan amount, which is typically about 0.5 percent plus taxes. Some banks waive the processing fee.
Documentation charges: In addition to the processing fees, lenders may ask borrowers to pay up a documentation charge which could be Rs. 500 to Rs 700 per loan basis.
Part prepayment and foreclosure charges: Making a part prepayment, in addition to the EMIs, towards the loan is something that lenders discourage. They, therefore, come with a prepayment penalty or a fee. Most lenders ask for a penalty of 3-6% (of principal outstanding) plus applicable taxes, of the prepayment amount or for foreclosing before the original term of the loan.
Some lenders may waive such charges on loans sanctioned especially during the festive season. Few may put conditions on prepayments and foreclosure by setting a minimum amount or an amount equal to one EMI and maximum amount at 25 percent of the outstanding principal in one year. So do read the terms and conditions carefully.
Other factors
These two parameters should not be over-looked.
Loan on ex-showroom or on-road price
The ex-showroom price includes manufacturers’ cost, dealer margin, and the cost of transportation. For every make and model of car, this price may vary from city-to-city, but within the city it will largely be the same across different dealers. At times, dealers may give a discount on ex-showroom price. Lenders generally offer 95-100 percent financing of the ex-showroom price.
However, that’s not the only cost while buying a car and driving it out from the showroom. The car has to be registered with the transport office and you need to get it insured as well.
The cost of registration, road tax, and insurance gets added up to the ex-showroom price and the resultant is known as on-road price. Most lenders finance up to 85 percent of this on-road price.
The difference in loan-to-value ratios between the on-road and ex-showroom price could be 10 percent or more.
Choosing the right tenure is important
Generally, car loans have a repayment period of 12 to 84 months. And usually borrowers are tempted to choose a longer tenure since the EMIs are lower compared to a loan with a shorter tenure. However, do keep in mind that longer the period, but higher is the total interest outgo.
