Once you decide on your dream car, everybody is in a hurry to drive it home. With the process of taking a bank loan being lengthy and time consuming, it is obvious that people think about ways to get an easy loan. However, it is better to take a loan from a bank than from car dealers. It makes sense to take some time, study the financial side of buying car before taking a decision.
You can approach a bank for an auto loan only if you already have an account or other banking relations. But anybody can walk into a showroom to buy a car and seek an auto loan too. In fact, you can also get a loan at the speed of choosing a car. Usually, in this case, either lenders associated with the car dealers or non-banking institutions that are linked with the dealers provide the loans. The paperwork for such loans is almost similar to that of a bank loan like providing account statements and employment details. Remember that 'hassle-free' and 'minimum conditions' loans carry much more liabilities.
When banks are offering auto loans at an interest rate of 10%, the 5.64% interest rate loans offered by car dealers could look much more attractive. Banks charge interest on reducing balance. Although the loan’s monthly repayment may remain the same, the amount paid to both interest and principal loan is different each month. This is because the interest charged on the principal loan amount gets lower each month as you continue to pay down your principal loan amount. In a flat rate interest plan, interest will stay the same on the principal loan amount throughout the loan tenure. In short, both 10% diminishing rate and 5.64% flat rate are the same when it comes to charging interest from you. Which means, you need to be careful about not only the interest rate but also the way it is calculated.
Fixed EMI or not
You may choose whichever bank you want to. But you should know how the EMIs are calculated. Some banks may opt for a fixed EMI. Others may have another facility. For e.g., your monthly EMI is Rs 10,000. You get Rs 1,00,000 in your hand unexpectedly and under this plan, you can pay the entire amount as the EMI. The next month maybe you could pay only Rs 5,000 but there won't be any problems.
Interest - flat or diminishing?
Check if the interest rate on the loan is flat or diminishing. If it is flat, you will have to pay up a certain percentage of your loan every month. For e.g., even if you have paid back Rs 50,000 of a Rs 1,00,000 loan, you will continue to pay interest for Rs 1,00,000. In case of diminishing interest rates, you need to pay the interest only on the remaining amount, that is Rs 50,000. It is better to choose a diminishing interest rate loan.
Bank usually charge a comparatively lower fee for processing an auto loan. Besides, during festival seasons, you can expect a discount on the fee too. The story is different when it comes to loans from other financiers. NBFCs offer attractive rates because they squeeze out maximum discounts from car dealers. This amount is higher than bank charges. You should bargain hard for the best discount from a car dealer and then opt for a bank loan.
Most banks do not charge any fees if you pay up your loan in advance, especially if your EMIs are paid regularly. But if you decide to prepay the loan from dealers and NBFCs, they could charge you 3%. Even if you decide to pay an extra EMI, then too you need to pay this 'fine'.
Banks will insist that buyers pay a certain percentage of the car's on-road price as margin amount. The on-road rate is calculated by taking into account the price of the car, the road tax and comprehensive insurance. But dealers may offer the whole on-road price as loan amount. They also add unnecessary fittings and other related costs, thus increasing the financial burden on the buyer. Such things go unnoticed since this is a 100% loan. You could also check if accessories are available at a cheaper rate from shops.