Buying a dream car is usually on the bucket list of many people; likewise, it was on mine too. However, buying a car without an auto loan is very unlikely, especially for salaried individuals. There are various points you need to keep in mind for taking a car loan and then being able to repay it faster without having to pay a tremendous amount of interest.
I am going to share my experience with you, but before that, let's discuss the steps to go through before opting for a car loan.
1. Down-payment and EMI calculation: Ensure that you have the right budget to make a down payment to the maximum extent, so that the pressure of EMI and tenure of the loan get reduced. Reduction of EMIs will substantially cut down the interest on the loan.
Banks may tempt you by offering to lend 100% of the on-road price of the car. However, if you have enough monetary resources, you can take a lesser amount of loan to buy the car. Also, calculate the EMIs on mymoneykarma auto loan calculator to determine what you can afford before choosing the loan.
2. The rate of Interest: The interest rate of car loans usually ranges between 9.5%-13.5% per annum on new cars, and it goes up to 15%-20% on used cars. Many banks adopt the practice of keeping the interest rate fixed for the entire loan term.
However, it is always advisable to choose a floating rate of interest as it gives the benefit of a lesser interest rate instantly whenever the rates are slashed.
3. Processing fee, foreclosure charges & the late payment fee: Choose the bank that has less processing fee, foreclosure charges, and late payment fee to reduce the overall cost of the car loan.
1. Make an additional payment:
If your budget allows, then increase the regular EMI payment. For example, if your EMI payment comes to be Rs. 12,000, you can then start paying Rs.13,000 without putting much burden on your pocket.
In this way, you will be paying an additional annual payment of Rs 12,000 towards the EMI, therefore cutting down your loan term and the interest outgo.
2. Part-payment of loan:
You can partly pay the mortgage from hikes in your salary or investment yield or annual bonus. It not only reduces the loan amount but also saves much interest that you might have to pay otherwise. Many banks and NBFCs offer this option. The more you stretch the loan repayment timeline, the more interest you pay. If you pay back a lump sum, the outstanding principal gets reduced and helps you save considerably on the interest.
However, before availing such an opportunity, confirm from the lender if there is any penalty for part payment. If there is a penalty, then find out the exact amount. Deduct the penalty amount from the savings that you would make on interest if you prepay a lump sum. Now, check the resultant savings after deducting the penalty fees. If the savings turn out to be ample, it's worth making a part payment.
3. Never skip the EMIs:
Some lenders may allow you to skip the payment once or even twice a year. However, try to resist such temptations, as skipping payments will lengthen the term of your loan and cost you more in interest.
In case you are jumping the payments on your own, remember that it will affect your credit score and your credit account can be declared as delinquent by the bank, which may reflect on your credit report for a long time.
4. Increase the EMI amounts over time:
There is an annual appraisal benefit provided by most of the companies, which results in a salary hike. At this time, you should be paying more amount towards EMIs. If you continue doing this each year, it will drastically reduce the loan tenure. Also, as you are paying more than the actual EMIs, the outstanding of the loan will be reduced.
5. Round up the payments and pay:
Instead of just paying what is mandatory, round up the amounts to the nearest number to repay your car loan more quickly. For example, if you are paying Rs. 10,200 for EMI, make it Rs. 11,000 as it assists in repaying the loan faster.
6. Choose the car as per affordability:
Assess your financial limit and purchase power before choosing a car model. For example, if your budget can afford a Ford Figo, you must buy it instead of purchasing a BMW, which is beyond your reach.
7. Keep a lid on the expenses:
Make effective financial plans by keeping expenses such as rent, electricity, food and some other miscellaneous expenditures in mind. Always make sure to keep your income level much ahead of the expenses, so that you can pay off the car loan much faster.
8. Don't take a new loan:
If you already have a home loan, then don't take an auto loan and put an additional burden on your pocket. You might not be able to afford it.
Taking out a new loan can leave an impact on your future credit by messing up your credit score. I had a credit score of 810 when I was approved for the loan. After two months of timely payments, I checked my credit score and discovered that it had dropped down by 15 points.
I had not missed any payments, nor had I accumulated a debt on my credit cards - so, the drop was entirely due to the new loan that I had taken. I realized that a 15-point slump isn't a problem if the credit score falls within the range of 700-800.
However, if the score drops to the 600 range, then 15 points can be the difference between loan approval and rejection.
It's not difficult to accomplish dreams nowadays, but doing it with intelligent planning is essential. If you go beyond your income level, then it will not be healthy for your financial life in the long run.
For best results, check your credit score regularly as well.
Here, mymoneykarma will suggest that you must prepare your budget wisely before taking any credit so that the spirit of accomplishment doesn't put you under massive debts.