Car loans have become one of the most popular financing options to buy your dream car. To attract more customers, banks and NBFCs are also offering innovative car loan options. Along with this, they are also providing many repayment methods to provide convenience to the customers. As a disciplined borrower, you should be aware about those different methods which are given as under.
Regular EMI: This is the most common type of repayment option that people avail of when opting for car loans. In this option, a monthly instalment amount is decided based on the tenure and interest rate of the loan. The rate of interest is the lowest in the regular EMI option. You can pay the EMIs either in the beginning of each month, called 'monthly in advance', or at the end of month, known as 'monthly in arrears'.
Step-up EMI: In this repayment method, you can pay lower EMIs during the initial years of repayment and gradually increase the EMIs as the tenure progresses. The interest applicable in this option is higher than that of regular EMIs.
Step-down EMI: Under a step-down repayment plan, the borrower pays a higher EMIs in the initial years of repayment till the loan tenure is completed. The interest rate with step down EMIs is higher than that in the regular EMI mode, however, the total cost may be lesser as the principal amount repaid back sooner.
Balloon EMI: In this method, the borrowers have the freedom to make lump sum payments towards the end of the repayment tenure. Though the rate of interest chargeable in this method is higher than in the case of regular EMIs, it reduces the initial burden of a loan on the borrower.
Special tie-up: In this repayment option, the car financer and the lending institution have a tie-up. This method offers the maximum benefit to the borrowers as it allows the excess funds from the account (either bank’s or the car financier’s) to be straightaway transferred to the loan account. Not only it saves a good amount of funds, but it also helps in reducing the total principal in the longer run.
Lease and refinancing: This option is rarely used for repaying the auto loans. In this repayment type, the EMI is directly paid to the financer, which is equal to the lease charges for the car and at the end of the repayment tenure gets the option of paying current value of the car.
Which option should you choose?
Each customer has a different set of financial considerations based on which they can find the most suitable option to repay their car loan. However, before choosing any one repayment method, you must have a thorough understanding of various options available in the market so that it makes it easier for you to take a more informed decision.