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Consider These 8 Points Before Taking an Auto Loan

An auto is a precious purchase, and numerous families take an auto loan to buy the auto. In this post, I bandy aspects that you must keep in mind while taking an auto loan.

1 Processing Fee

Car loans are short to medium term loans. generally, 3 to 5 times. Hence, the impact of processing figure is spread over a shorter term. therefore, a high processing figure can fluently increase the overall cost of the auto. GST is also applicable on the processing figure.

Let’s understand this with the help of an illustration.

  • Loan quantum = Rs 5 lacs
  • Loan term = 3 times
  • Interest rate = 9 sire
  • EMI = Rs 15,899

Case 1

Nil Processing figure.
Effective cost of Loan = 9 sire
Case 2
Processing figure 2 GST = Rs 10,000 18 GST = Rs 11,800
Effective cost of Loan = 10.64 sire
This is a sharp increase in the cost of loan. And shorter the loan term, sharper the increase.

still, the effective cost would have gone up from 9 p, If the loan term were 5years.a. to10.03 sire
How could you be tricked? If you’re simply fastening on the interest rate and ignore the processing figure, you could make a wrong choice.

Let’s consider this illustration.

  • Lender A offers a auto loan at 10 sire and o processing figure.
  • Lender B offers a auto loan at 9 sire and 2 processing figure.

You go with LenderB. latterly, when you do the calculation, you would find that the factual cost of loan is10.64p.a. You would have been better off with a loan from LenderA.
thus, while enquiring about auto loans, don’t just ask and compare interest rates. You must find out the processing figure or any other charges in the loan. Calculate the each- by cost.

2 Fixed or Floating

In a fixed rate loan, the interest rate remains constant during the entire loan term. In a floating rate loan, the interest rate can change with changes in the underpinning standard.
From what I’ve seen, private banks tend to offer fixed rate auto loans. Public sector banks( SBI is an exception) tend to offer floating rate auto loans.

In an ideal world where you knew about the line the interest rates would take, you would take a fixed rate loan if the interest rates were about to rise. And go with a floating rate loan if the interest rates were about to fall. But it isn’t easy to prognosticate how interest rates would move. Hence, this makes the choice tricky.
Auto loans are short to medium term loans. thus, unless you have strong conviction about which way interest rates are headed, just compare the current rates( along with all in cost) and go with a lower cost loan.

3 Repayment Charges

Floating rate loans can not have repayment charges. And that’s due to a nonsupervisory directive. Fixed rate loans can have repayment charges. In fact, repayment charges on fixed rate loans can be relatively hefty going up to as important as 4- 5 of the outstanding loan quantum. A many banks may waive off the repayment charges after 2- 3 times.
thus, if you plan to compensate your auto loan, a floating rate loan may be a better choice. Or choose a fixed rate loan that waives off the repayment penalty after a many times.

4 EMI in Arrearsvs. EMI in Advance

EMI in arrears is your regular loan EMI.

Under Loans with EMI in Advance, the first EMI is acclimated with the expended quantum, effectively reducing the loan quantum. therefore, the EMI is also lower compared to EMI in arrears loan product.
The cost of the loan remains the same unless there are fixed charges similar as the processing figure. similar fixed charges will increase the cost of ‘ EMI in Advance ’ more

No significant difference.

The only thing you need to watch out for — If you concentrate on just the EMI quantum to assess your affordability, the lender/ agent can tricky you with a lower EMI( through ‘ EMI in Advance ’ product) without offering you a lower interest rate.

5 Flat Interest Rate vs Reducing Balance Loan

You’re doubtful to fall for this in India since I haven’t seen leading lenders offering similar products. Still, a loan is a contract and there’s no bar on similar products. therefore, it’s good to consider this aspect in this post.
Let’s say the banks are offering auto loans at8.5- 10p.a. You have been hunting for a better rate.

The only caveat( and you may not notice) It’s a flat rate loan( and not reducing balance loan).
What’s the difference? Huge.
Flat rate loan The computation works else. First, you calculate the interest on the total loan quantum for the entire term.

3- time- loan term. 5 lacs loan. 7 sire
Interest for 3 times = 5 lacs x 7 sire x 3 times = Rs1.05 lacs
EMI = ( Loan quantum Total interest over the loan term) ÷ Loan term in months
= 6.05 lacs ÷ 36 = Rs 16,805

Reducing balance loan You’re charged interest only on the outstanding balance every month.
What was the EMI for the same Rs 5 lacs( reducing balance) loan at 9 sire for 3 times?
Rs 15,899
So, a 7 flat rate loan is more precious than a 9 reducing balance loan.
For apples- to- apples comparison, a 7 flat rate loan is the same as12.83 sire reducing balance loan.
Guard if the loan interest rate is too seductive.

6 Loan Insurance Is Not obligatory

Everybody has targets. Banking staff. Auto dealership staff. And indeed you and me. These targets come in all shapes and sizes. And these targets need not be linked to your primary exertion.
So, a banker may be asked to vend insurance programs or collective finances. also, the staff at bus- dealerships may be asked tocross-sell products.
One similar product is loan insurance. In case commodity happens to you( demise and disability), the insurance company will settle the loan on your behalf.
While this is a good point, you may formerly have sufficient life, health, and disability. And may not want such a product shoved down your throat.
You may be told that your loan wo n’t be sanctioned unless you buy this product. And since you’re a interned client, these products can be relatively precious. We’ve seen this with Home Loan Protection Plans( HLPPs).
Now, there’s no bar oncross-selling. Auto dealerships and banks can try to vend whatever they want.
But there’s a bar on linking the permission of loans to buy of third- party products. Banks NBFCs ca n’t do that. Note RBI doesn’t regulate auto dealerships.
still, simply shoot an dispatch to client care of the bank and ask if there’s such a rule, If you’re being pressurized. The banks ca n’t confirm this over dispatch and will answer in the negative. This problem will bus- resoluteness.

7 Advanced the CIBIL Score, Lower the Interest Rate

Banks NBFCs now link the interest rate to your CIBIL score. You can check this on the SBI website too.
I understand you can not change your CIBIL score overnight but there’s an incitement to keep an eye on your CIBIL score and keep it high.

8 Everything Is Negotiable

The price of a auto is negotiable. The gifts are negotiable. Yes, there’s give and take but you can negotiate.
Auto insurance is negotiable. Well, you must buy auto insurance. Just that you do n’t have to buy from the dealership. No matter how important your dealer insists, there’s no coercion to buy auto insurance( not loan insurance) through the auto dealership. You can fluently save 20- 30 of the insurance cost if you bypass the dealership and buy auto insurance directly.

Indeed if you’re taking a loan through a dealership( dealerships have tie- ups with lenders), you can negotiate. The dealerships act as sourcing agents for the lenders and get commission for loans reserved. From what I understand, the dealership gets a range of interest rates from the lenders to bespeak loans at. The advanced the loan interest rate, the further is their commission. To bespeak the trade, the dealership might offer you a lower interest rate.
You just need to ask and be firm. There isn’t important to lose. And yes, don’t club everything and also deal. Negotiate for these benefits independently.

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