Buying a car is a dream for many, whether for family or business, and with a car loan, it’s easier to pay for it. All you have to do is arrange for a down payment, which about 10-20% of the car’s price. Some financial institutions, like Mahindra Finance, don’t even need that and can finance 100% of the card. Here’s all you need to know about a car loan.

What is a Car Loan?

A car loan is a type of secured borrowing you can get to purchase a car. As discussed, you generally take an advance of a part of the amount or the whole amount of what the vehicle is valued at and repay it with interest over time. The loan is repaid through EMIs (Equated Monthly Installments), which are composed of two components – the interest and principal (the borrowed amount). A key thing to note is that the vehicle acts as collateral, and if you default on the repayment, the financial institution will seize it.

Key Features

Some important aspects of a car loan are:

• Interest Rate: The cost you pay to the financial institution for borrowing.
• Tenure: This is the duration for which you borrow; the loan will be fully repaid by this period or earlier, if you make prepayments.
• Down Payment: The sum of money you pay at the beginning before you get the loan.
• Processing Fees: Financial institutions levy this fee to process your application, and it’s usually up to 1% of the loan amount.
• Prepayment: This is when you pay a part or all of the loan earlier, which helps reduce your total interest and lets you be debt-free sooner than planned.

Eligibility Criteria

• Age: You should be above 18 or 21 years while applying and under 60 or 65 when the loan tenure ends.
• Income: You need to provide proof of stable income. Something like salary slips, bank statements, or income tax returns.
• Credit History: A good credit score will help you get loans more easily, as it shows your repayment capabilities.
• Existing Debts: If you already have other loans, repay what you can to lower your debt burden and improve your eligibility.

Pros and Cons

Pros:

• You can get your car immediately without having to wait for years to save the whole amount.
• The repayment is comfortable, particularly if your income is regular, as it’s in installments.
• Paying off the loan on time will help build your credit score, so not only do you get an asset from it but also improve your creditworthiness.

Cons:

• Since you have taken money on loan, you have to pay interest, so the amount you have to pay back would be higher than the value of the car.
• There is a chance of penalty or repossession if you miss payments.
• If the tenure is longer, you would have to pay more interest.

Smart Tips

• If possible, opt for short tenure so that you don’t have to pay a lot of interest.
• If you have surplus money, such as from a bonus or pay increase, attempt pre-paying, but be sure to review any pre-payment charges so that you end up saving more.
• Clear any old debts and make payments on time so that you can have a better credit score which can come in handy when applying for the loan.

A car loan is a huge commitment that can affect your lifestyle. So, make sure to do your research and check out multiple financial institutions to see which one’s giving you the best offer. This will help ensure you get the car without burdening your finances.