Purchasing a car is one of the biggest investments after buying a home. It is a major life decision that requires a lot of effort too which includes research to find the best car within your means, available financing options, add-ons of your car, etc. Though each factor holds importance, finding the right financing option or getting the right car loan should always be your top priority if you do not want to end up paying more than you can afford. So, if you are planning to make a smart move while opting for car loans, we would suggest you read this before finalizing your decision.
Here we have compiled some of the common yet costly mistakes that most of the people make while choosing a car loan.
Not evaluating your Credit Score and FOIR
Both the terms are extremely important as it helps lenders to gauge your creditworthiness. Firstly, the lenders will check your credit score to know about your past repayment history. If your score is good and matches the lender's requirement, you will qualify for the loan at a low interest rate. Post checking your credit score, the lenders will check the FOIR i.e. Fixed Obligation to Income Ratio. This calculation takes into consideration your monthly income, present liabilities, loan amount requested, and your repayment ability. The lender may not grant you the loan if you do not have enough disposable income left after catering to your present liabilities. Being an informed borrower, one must check both the factors before applying for the car loan to boost their loan approval chances.
Not comparing offers from different banks
Not comparing offers across multiple lenders is a common mistake that most of the applicants make. There are two ways to finance your car – through a financial institution or a dealer. Whatever financing option you are choosing, make sure you look at different deals before picking the best one. Doing so will help you in saving a considerable amount of money in total outgo of the loan.
Choosing a long loan tenure
The longer loan tenure may sound appealing as your monthly EMIs becomes smaller. But do not forget with a long tenure you also have to pay more than what you have initially borrowed along with the additional interest. So, opting for a longer loan tenure is not a smart move. Not only it increases your cost of borrowing but also the value of your car will depreciate to a great extent by the time you are done paying off the loan dues.
Selecting the “No Down Payment” option
Zero down payment offers by the lenders are just the marketing gimmicks that look very tempting. It implies that you will be paying more on future EMIs resulting in a higher interest outflow. So, selecting a no down payment option is not a wise move while applying for car loans because it will not help you in saving any money.
Financing for car add-ons
When you buy a new car, it needs several add-ons such as parking sensors, body cover, seat cover, music system, etc. to make your car experience more enjoyable. Taking all the expenses of car add-ons together makes up a huge amount. Your lender or dealer may offer you financing for such car add-ons which increases the total loan amount. This will result in you spending you a lot for your car loan. So, instead of taking up financing for add-ons, you could instead purchase them from any car-accessories market for a much cheaper price to save your money.