Five must-knows about a CAR LOAN

Often people are in a hurry while buying a car. The excitement to drive your new car is no doubt exhilarating, but before you actually buy a car it is important to understand the terms and conditions of an auto loan.

1. Down payment

A leading public sector bank is offering 85 per cent loan on road cost of a car. A lot of banks offer 100 per cent ex-showroom cost of the car. If you are a privileged customer of a bank, you may even get a 100 per cent on-road cost of the car.

But at creditvidya.com, we always advice people to make maximum down payment so that the dependency on loan is reduced. Also, it reduces the interest that you pay proportionately over the tenure of your loan.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

2. Interest rates

The current rate of interest on auto loan is around 10-10.5 per cent per annum. Many banks have fixed rate of interest through the loan tenure. It is always better to choose floating rate of interest so that if the interest rate goes down, you stand to benefit from it.

It is anyways important to consider macroeconomic scenario before you go for floating or fixed rate of interest.

3. Your Cibil Score

You really don't need any surprises when you go for that car loan so it is imperative that you clear up old debts that could harm your car loan application.

You should first get your Cibil Report and review it carefully. Data at Cibil indicates that 90 per cent of loan approved are for credit score of 700 plus in the year 2011.

If you have no credit (no loans, credit card) it would be a good idea to establish some credit before applying for the loan.

4. Foreclosure charges

When you are taking an auto loan, consider the kind of foreclosure charges you may have to bear. Many public sector banks have banned foreclosure penalties.

5. EMI and loan tenure

Before you chose the car you want, see how much funds you have for down payment and how much loan you may need. Your EMI is dependent on your loan value and loan tenure. Try to keep your loan and tenure short. That way you will be paying much lesser interest.