Car Loan

What is an Automobile Loan or a Car Loan or a Vehicle Loan?

A car loan (auto loan) is a great option for people who don’t have the cash to buy a new car. The loan can help you whether you are buying a new or used car. An auto loan involves borrowing money from a lender to buy a car. Upon receiving the funds, you must repay them over a specified time period and pay any fees or interest.

Disbursement of the first Car Loan:

General Motors Corporation introduced car loans in 1919 in the United States. This was in response to the growing demand for automobiles among American consumers after World War I. In 1919, General Motors Corporation expanded its offices to five North American cities. A year later, it opened its first office in Great Britain.

Car Loan:

A car loan is a form of financing that a lender, such as a bank or NBFC (non-banking financial company) offers to an individual, allowing him or her to purchase a vehicle. The borrower agrees to buy the vehicle when he or she takes out a loan for it. As per the loan agreement, the borrower gains the right to drive the car and keep possession of the car’s title. But technically, the borrower doesn’t own the car yet; the lender holds it until the borrower has paid off the loan.

Popularity of Car Loans:

Nowadays, car loans are becoming increasingly popular. The flourishing middle class in India has transformed cars from a status symbol to an essential commodity. In response to the rising popularity of car loans, many banks and NBFCs are currently offering this type of capital to individuals with excellent credit histories. It’s important to keep in mind that these loans are for depreciating assets. Thus, the car you buy with this borrowed money will actually cost you less over a period of time.

Owning a Car:

The biggest achievement people consider is being an owner of a car, whether a first hand or a used one. This probably also serves as a symbol of financial independence and gratification besides its practical utility. Aspirations to own a car continue to rise in our country. Having some extra money available to us often leads us to purchase a car. Many new models are available on the market, which makes us want to drive one of those hot wheels.

Good Credit Score:

The dream of owning your favorite car will no longer be a fantasy if you have a regular source of income and a good credit score. There are many options to figure out comfortable EMIs when applying for car loans today. When you make informed decisions and smart choices, you will pay off a car loan and manage the rest of your finances for other necessities.

Manufacturers are the Lenders:

Because of the surge in sales of cars, manufacturers themselves have entered the loan market to allow buyers to purchase their dream cars at affordable rates. Many of the renowned brands such as Audi, BMW, Bugatti, Datsun, Ferrari, Fiat, Ford, Honda, Hyundai, Isuzu, Jaguar, Jeep, Kia, Land Rover, Mahindra, Maruti Suzuki, Maserati, Mercedes Benz, MG, Nissan, Porsche, Renault, Skoda, Tata, Tesla, Toyota, Volkswagen provide loans for their in-house models. It is beneficial for the buyer to get the manufacturer’s finance. Here, the loan gets processed within no span of time, along with favorable loan terms.

Car Loan Interest Rate:

Loan value and loan tenure are two of the most important factors in determining car loan interest rates. Apart from this, an individual’s credit score will also play a role in determining the interest rate. Credit scores are determined by factors such as existing debt, income stability, past credit card, and loan payment patterns. The higher the credit score, the better the chance of getting a loan approved. With a better credit score, you can get a better deal on interest rates. If the loan term is longer, the interest rate will be lower. Moreover, a new car loan would have a lower interest rate than one on a used car.

Frequently Asked Questions (FAQ’s) – Car Loan

Yes, used cars can be financed with a car loan. However, the interest rate for this loan would be different from that for a new car. It would only cover the actual cost of the car. Any other costs such as transfer of registration, etc., would have to be borne by the borrower.
A car loan is a loan given to an individual who is interested in purchasing a car. As a result, a car loan is a secured loan, where the car you purchase acts as collateral. This means you do not need to provide any other collateral with a car loan. The bank will have to endorse the RC (registration certificate) of the car. The endorsement is revoked once the loan is repaid.
Depending on the bank, the maximum amount of the loan may vary. Banks typically approve loans ranging from 80% to 90% of the vehicle's on-road price. Only a few banks loan 100% of the car's ex-showroom price. Additional criteria that determine the amount of financing offered include price, type of car (standard/premium), and whether you are applying for a new or used car.
Similar to any other loan application, you must submit supporting documents such as proof of income (last three pay slips/latest acknowledged ITR), address, and identity proof along with your PAN card. Apart from this, if there are any other documentation requirements, those tend to differ from lender to lender.
Car loans have a duration of one year to five years. EMI payments for shorter loans are higher than those for longer ones, and vice versa. A few lenders are currently providing car loans with longer terms of up to 7 years.
The majority of lenders do not specify a minimum salary requirement for their loans, but your application may be denied if your salary does not exceed a predetermined threshold as determined by the bank for internal purposes. To increase the chances of getting a car loan approved, you might consider applying with a co-borrower.
You may need a co-borrower or a loan guarantor if you do not meet the loan eligibility criteria such as income, age, and credit score. Providing that you meet all these minimum lending requirements, you can apply for a car loan on your own.
Your loan application may be rejected if you have a bad credit score, have defaulted on your repayments, have applied for and been rejected for loans multiple times, etc. In addition to meeting these criteria, you should also meet the bank's eligibility requirements, such as minimum income, age, previous relationships, etc.
Not at all. An automobile loan does not qualify for tax savings in any way, unlike a home loan. As a result, car loan amounts should always be determined by your actual loan needs, as taking a huge loan amount to purchase a fancy car is not advisable.
Generally, a fixed rate car loan means that the rate of interest stays the same over the period of time. Thus, the EMI payment requirement for fixed-rate car loans does not fluctuate with market conditions. On the other hand, floating rate automobile loans have a periodically varying interest rate based on the lending institution's decision.
Your credit history and prior relationship with the prospective lender will help you negotiate the interest rate for your car loan. Paying your regular EMIs for previous loans or credit cards can help you qualify for a car loan with a lower interest rate.
According to the RBI directive, from April 2016, banks have been using MCLRs (marginal cost of lending rates) to determine interest rates on a variety of loans including auto loans. Banks are currently using MCLR-based rates for car loans, which are slightly lower than the base rate method they used previously. Further, financial institutions will have to adjust their rate of interest on loans every six months or once a year under the new regulations.
When you purchase a vehicle, you must pay insurance and registration fees. A car loan won't cover those costs. A mandatory car insurance policy must be purchased separately and all registration-related costs must be borne by you alone, as they are not included in your car loan. However, some banks offer special schemes to cover these costs.
Most lenders will let you pay back your car loan early, but there may be a few conditions. Usually, car loan providers allow repayment only after you have completed the specified loan tenure. There is also a prepayment penalty. These penalties typically range from 1% to 4% of the loan amount. Before you make a prepayment, you should confirm with your bank all charges that apply.
Definitely not. Individuals who get car loans are only allowed to sell their cars to new owners when their loans are fully paid off. In other words, before you can sell your car, you need a NOC from the bank, which will only be released when your car loan is paid in full.
Loans can be repaid by means of post-dated checks (PDCs) that you provide to your lender when applying for a loan. An auto debit facility is another option, where the EMI is automatically debited from your savings account after you provide an ECS (Electronic Clearing Service) mandate to the lender.
Banks consider you a defaulter if you do not pay two or more EMIs on time. In the beginning, you will be charged a penalty fee and asked to regularize your payments. Financial institutions can legally repossess your vehicle if you do not regularize your payments after repeated notifications. This will negatively impact your credit score, and you may find it difficult to obtain a loan in the future.
When you pay off your loan in full, the bank issues Form 35 and an NOC (No Objection Certificate) to the RTO (Road Transport Office). The lender's name will then be removed from the RC book endorsement.
It is not necessary to have an account with the bank which you approach for a Car Loan. It is definitely in your best interest to take out a loan from the bank offering you the lowest interest rates. However, taking a loan from a lender or bank you have dealt with previously may improve your chances of getting hassle-free approval, faster processing, waiver of processing fees, etc.
A few automobile manufacturers offer zero percent financing in collaboration with lenders. In this plan, the automobile manufacturer is responsible for repaying the interest on the loan to the financier, not the borrower.
Due to the manufacturer's responsibility to pay the interest component of the car loan, he would have to increase his profit margin on sales. Therefore, zero financing car models typically cost more than models without this feature.
Usually, zero-finance options come with a lot of terms and conditions that are not typically applicable to a standard car loan. The duration of a zero-financing loan typically ranges from 12 months to 15 months, so your monthly premium payments will be much higher than those of a standard car loan. You may also need to make a much larger down payment than you would on a traditional car loan, which can stretch your monthly budget.
Almost all traditional banks offer car loans including State Bank, Axis Bank, Union Bank, HDFC Bank, ICICI Bank, Kotak Bank, etc. It is easy to get a car loan through these financial institutions and many others as well.
In fact, yes. There are several NBFCs (non-banking financial companies) that offer car loans to individuals. Among the top NBFCs providing car loans for prospective buyers are Mahindra Finance, L&T, AU Financiers, Bajaj Allianz, Sundaram Finance, and Reliance Consumer Finance. Many NBFCs offer car loans that are as competitive as those offered by traditional banks.
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