Factors to consider while taking a Vehicle Loan

Congratulations on deciding to buy a white elephant that is coming to you with a huge debt that you will be paying off for the next 10 years of your life. 

Getting a picture taken with a styrofoam key with your brand new vehicle might be a somewhat cheesy experience, but it sure is a pleasant one. Whether it’s buying the first scooty to commute to and from your place of education or work or buying a car, the purchase of a vehicle is both an accomplishment and an endeavour.

The purchase is an accomplishment for obvious reasons, but properly handling your finances makes this task an endeavour. The most common dilemma is the choice between your own or borrowed funds. Using your own funds helps you remain debt-free, but can punch a serious hole in your pockets. Borrowed funds, when managed well, can help you undertake a lot of purchases that might not be possible with the funds you own.

You’re not alone in the confusion about the source of funds! Today, let’s discuss the prerequisites for choosing borrowed funds to purchase an asset like a vehicle. If you take care of some significant factors, you can ease your pockets and extract the maximum benefits. 

So, let’s dive into the article and look into the various nuances that a vehicle loan comprises.

Vehicle loans: An overview

India has always been a very strong advocate of using public transit. A large part of the public chooses this mode of transport due to its affordability. However, public transit has its limitations in terms of limited reach, unavailability during odd hours in case of emergency etc. The covid pandemic also turned the convenient transit mode into a hazard. As a result, the demand for private transport vehicles has seen a gradual uptick.

Major automobile companies like Maruti Suzuki and Hyundai saw an increase in sales by 13.2% and more than 6% in FY22. Hyundai, India’s second largest automobile manufacturer experiences a sales growth of more than 6% for the same period.

The introduction of EVs to the mix has also shifted the public perception of owning a personal vehicle. Tata Motors, a major player in this field experienced a total sales growth of around 67% with EVs alone experiencing a 353% increase in production.

This increasing demand is mostly fulfilled by use of borrowed funds in the form of vehicle loans. Vehicle loans are secured loans availed with the specific intent of buying an automobile. The purchased vehicle acts as the collateral for the loan. This means that the lender can seize the vehicle in case of default in repayment of the loan by the borrower. The seized vehicle can then be sold off by the lender to recover the loan amount.

Vehicle loans vary based on the lending bank/NBFC, but these are the factors one should look out for when buying a vehicle using external financing.

Credit score and other eligibility criteria

Whenever you plan on taking a car loan, credit score forms the primary eligibility criteria. Ensure to pay any previous loan dues and take the necessary steps to improve your credit score. This will increase your chances of availing of the loan. Also, look into other factors like your income level, job stability, and other factors that a banker would look into. 

Improving your credit score before applying for a loan is like cleaning and organizing your house before having guests over ;) 

Eligibility of the car

Once you check your eligibility to avail of the loan, you must now check if the car you wish to buy is even worth it. Purchasing a new or a used car is entirely your choice to make. But this choice of yours has certain implications. 

Certain banks do not provide loans for used cars, and the banks that extend car loans for both used and new cars have different clauses. For a used car, the eligibility of availing of a car loan would depend on whether you are purchasing it from a dealer or an individual, the car’s age, and a few other points of criteria. (Tedious work!)

Basic factors

Now, let's look at certain fundamental factors to be considered. 

Interest charged is a significant factor, and you must carefully choose between fixed or flexible interest rates. Compare the interest rates provided by various lenders. 

Then comes the tenure of the loan. Make sure that the period is not too long or too short. Loans taken for a very long term would lead to an excess outflow of interest, and the short ones would mean that each installment payable would be more extensive. You must have a super fat purse in such a case.

The EMIs payable at every interval would depend upon the downpayment you pay. Try to pay a huge chunk as the down payment so that your installments are considerably reduced. This would reduce the interest payments as well!

The banks or other lenders charge a certain amount as processing fees in the name of administrative work. The fee varies according to the times of the year. Few borrowers tend to consider this charge as meagre and ignore it. However, in reality, it is a significant amount, and you must not ignore it! (Value money, bro!)

You can choose to repay the entire loan borrowed along with interest before the term of the loan. But, bear in mind that although it is a great way to improve your credit profile, it might attract some charges.

Last but not least, ensure that you really agree to the terms and conditions mentioned in the contract. Don’t get tricked into unprecedented mishaps!  

Credit insurance

When you opt for a loan for a commodity like a car, the lenders usually offer you credit insurance. Credit insurance is a type of insurance that will cover the payment of loans and installments. 

At most, you don’t really need one, but if you feel the need for it, check the terms of the insurance contract before accepting it. The lender would provide you with options of agencies that they are associated with. Analyze these options carefully and also look at the terms of other insurers. Again, DO NOT GET TRICKED!

Dealer or bank

Many individuals prefer taking a loan to purchase their vehicle. The dealers see an opportunity here and offer to provide you vehicle loans on their own. They do this by either affiliating with banks or establishing their own NBFC. Smarties! 

Although this seems hassle-free, you must be cautious as a purchaser. The dealers do provide various offers, but it might be at the cost of increasing your vehicle’s cost. One tip to remember is to negotiate the terms of the loan and the vehicle purchase individually.  

Service tax

Similar to the processing fee, service tax is another charge levied by the banks upon its customers. (Aghh! There are so many!) The frequency of payment of this service tax differs from one bank to another. Where some lenders charge it at once, in a few banks, it is payable every year. 

The service charge is undoubtedly a considerable amount and must not be ignored. Having to pay this in frequent intervals can shoot up your total cost. Do check the service tax payments with your lender before finalizing the contract. 

Acceleration clause

An acceleration clause refers to a clause in a contract that allows the lender to demand the entire amount borrowed at once. This is a very common provision present in car loan contracts. This clause can be activated in certain circumstances. For example, when the borrower defaults the EMI payments, when he has been declared bankrupt or he intentionally breaches the contract. In such cases, when the borrower defaults the EMI payments, is declared bankrupt, or intentionally breaches the contract are a few examples when the acceleration clause can be activated. It is advised to read and fully understand the acceleration clause of the lender before taking a car loan.

Final words

Borrowing a loan to accomplish an objective is not wrong. However, choosing the right lender is very crucial. Today, we covered the major points that you can compare and contrast between various lenders and choose the most feasible option. Do not fall for their marketing strategies. It is always advised to be cautious and make an informed decision. Happy buying!