FAQs related to Car loan

What is a car loan?

A car loan is a loan which is backed by a collateral i.e. financial assets you own such as a home or car that can be used as a payment to the lender if you make any default in repaying your loan.

Can I apply for a car loan to purchase a used car?

You can easily take a car loan to buy a used car. Since you are buying a second-hand car, the cost will be relatively cheaper than that of a new car. 

What collateral do I need to take a car loan?

A car loan is a secured loan where you keep your car or any asset that you own as collateral. Therefore, there is no additional collateral requirement apart from this. However, you need to get the RC (registration certificate) of the car endorsed with the bank. This endorsement is cancelled after the repayment of the loan is completed.

What maximum loan amount I can avail through a car loan?

The maximum loan amount approved may vary from one bank to another. Usually, banks approve loan amounts that range from 80%–90% of the on-road price of the car. Most of the lending institutions even offer financing of up to 100% of the car’s ex-showroom price. In addition to these criteria, the percentage of financing offered also depends on certain other factors such as the price of the car and type of car i.e. new or used car.

What is the final price I will have to pay for the vehicle?

Despite the low rate of interest, some lenders charge borrowers heavily for processing, documentation, prepayment, foreclosure, late charges, the default in payment, etc. This increases the overall loan amount of the car. Therefore, the borrower is advised to check the final amount that he will have to pay over the period by using the Car Loan EMI Calculator. Therefore, it is recommended that you should check various aspects such as principal loan amount and tenure to get the car loan at the lowest interest rate and save their money.

What documents do I need to avail a car loan?

Like any other loan, your car loan application also requires self-attested supporting documents such as income proof (last three payslips/last acknowledged ITR), address, and identity proof documents along with your PAN card. However, the documents may vary from one bank to another.

What is the tenure for car loans?

The tenure of a car loan ranges from 1 year to 5 years or it can go up to a maximum of 7 years. The shorter the loan tenure, the higher is the EMI payable, and the longer the tenure, the shorter will be your EMIs along with the additional rate of interest.

What is the minimum salary required to apply for a car loan?

Generally, most of the lenders do not specify a minimum salary requirement, your loan application may be rejected if you do not meet the salary eligibility criteria as required by the bank. In such cases applying with a co-borrower or co-applicant might be a better choice to boost your chances of car loan approval.

Do I need a loan guarantor or co-borrower?

You will need a guarantor or co-borrower in the case when you are applying a loan for the very first time and have low credit score. Having a co-borrower in such a case will boost your loan approval chances.

Are there chances of my car loan application being rejected?

Your car loan application may stand rejected if you have a low credit score, have defaulted on your repayments, or when you have filed for multiple loan applications even after getting rejected, etc. Besides this, your loan application can also be out rightly rejected in the case where you do not meet the bank’s eligibility criteria such as minimum income level, age, income criteria etc.

Is there any tax benefit on a car loan?

Unlike a home loan, a car loan offers no tax-saving benefits. Therefore, you should always opt for such a car loan amount which you can repay easily. Splurging on a high-end and fancy car by taking a large loan amount is not a smart decision.

What is the difference between a fixed and a floating rate car loan?

In the case of a fixed rate car loan, the rate of interest on the car loan remains the same. Therefore, fixed-rate loans have a specific EMI payout requirement that does not change due to market conditions. In the case of a floating rate car loan, the applicable interest rate varies periodically as per the lender’s decision. Thus, the EMI payable on a floating rate loan changes from time to time.

What is the rate of interest charged by banks on car loans?

It is one of the most important questions that you should be asking before choosing a car loan. There are many of the banks and NBFCs that offers car loans at low-interest rates. Generally, borrowers who have maintained a good repayment history and have good credit scores can get a loan at relatively lower interest rates. 

Is the rate of interest negotiable?

You can negotiate the interest rate on your car loan by leveraging your credit history and prior relationship with the prospective lender. The regular payment of EMIs for previous loan/credit cards you had/have with your prospective lender can help you secure a car loan at a lower rate of interest.

What fees are included in the car loan?

Apart from the interest amount, a borrower is required to pay several charges while opting for a car loan. You should always ask about the charges applicable on the loan both at the time of sanctioning the loan and while repaying it. Some of the most common charges and fee levied on the customer are loan processing fee, documentation charges, credit report charges, registration certificate collection charges, stamp duty, part prepayment charges, foreclosure charges, late payment charges, amortization schedule charges, loan cancellation charges, swap charges, bounce charges, etc. You should compare the additional fee and charges of various banks before finalizing your lender.

Can I get financing for insurance and registration?

Car loans do not cover the insurance or registration fees that you need to pay at the time of purchasing the vehicle. Mandatory car insurance needs to be purchased separately and all vehicle registration-related costs also need to be borne by the buyer as they are not covered under your car loan application. However, few banks cover these costs under special car loan schemes.

Can I pre-pay my car loan?

The pre-payment of car loans is generally allowed by many lenders but with a certain few terms and conditions attached. The lenders allow car loan prepayment only after you have paid 12 EMIs along with a certain pre-payment penalty that usually ranges from 1%-4% of the car loan. So, it is recommended that you confirm all the relevant charges with your bank before making a pre-payment.

Can I sell my car before repaying the car loan completely?

It is not possible to sell your car to the new owner before paying your loan amount in full. This is because you need to get a NOC (No Objection Certificate) from the bank before selling your car and the document is released only after you have paid the entire loan amount.

How can I make my car loan EMI payments?

The car loan repayment is done through post-dated cheques (PDC). Another option is an auto-debit facility where the EMI is automatically debited from your savings account after you have provided an ECS (Electronic Clearing Service) mandate to the lender.

What if I do not pay my car loan EMIs on time?

Generally, your bank will treat you as a defaulter if you fail to pay two or more EMIs on time. Initially, the bank will be charging you a penalty fee and will ask you to regularize your payments. If you fail to make your payments after repeated notifications by the financial institution, in that case, they can repossess your vehicle legally. Subsequently, your credit score will also be impacted, resulting in severe complications in future loan approvals.

What should I do after paying the last EMI of my car loan? 

After paying off your car loan in full, the bank issues Form 35 & NOC (No Objection Certificate) to the RTO (Road Transport Office), and the lender’s name will get removed from the RC book endorsement.

What is zero percent financing?

It is an offer provided by a few automobile manufacturers with a tie-up with the lender. Under this scheme, the automobile manufacturer is responsible for paying back the interest on the car loan to the financier instead of the borrower.

Why are zero percent financing car models expensive than the other ones?

Since the manufacturer is liable to pay the interest component of the car loan, the manufacturer will have to maintain a higher sale profit margin. This is the reason why the cost of zero financing car models is much greater than other car models.

Are there any special terms and conditions attached to the zero percent financing?

There are a few terms and conditions associated with zero financing options that are not applicable in case of a standard car loan. For example, the usual tenure of a zero financing loan ranges from 12 months to 15 months hence your premium payments will be much costlier than that of a standard car loan. Additionally, you will need to pay a much larger down payment amount as compared to the standard car loan, which will stretch your monthly budget and put a strain on you.

Can you manage the maintenance expenses of the new car?

Maintaining a new car is not easy. There are several expenses involved and hence before you decide to buy a car, ask yourself if you can afford to spend on the maintenance of the car which will include repairs, regular servicing, replacement of parts, etc. The cost of maintenance of the car will also vary according to the car model you buy. If after evaluating the expenses of car maintenance, you feel that you can afford it, you can go ahead and apply for a car loan.

How long does it take to get a car loan sanctioned?

If the bank finds all the documents valid and capable of paying the loan EMIs on time, your loan will be approved within a short duration.

Can you afford to repay the loan?

Before applying for car loans, it is important to assess if you can afford the loan or not. For this purpose, you can make use of an online financial tool known as 'Car Loan EMI Calculator' to calculate your monthly EMIs. Remember, if you have other loans for which you are paying EMIs, it is recommended that you clear those first before applying for a car loan.

Which car models I can finance with a car loan? 

Almost every type such as small, medium, and large cars can be bought with a car loan. However, do check the fine print of the bank’s brochure to check if there are any exceptions.

Can I get a pre-approved car loan offer?

Generally, a pre-approved car loan is offered by the bank to an existing customer who has a good credit track record with them. The benefits of a pre-approved loan are quick loan approval, zero documentation, instant funds, higher loan amount low-interest rate, and processing fee.