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How To Make Your Car Loan A Joyful Ride

The state of public transport, in most cities and towns in India, is quite pathetic. Therefore, buying your own vehicle is often a necessity, not a luxury.

And, the levels of dust, pollution and noise are increasing day by day. Therefore, if your budget permits, a car would probably be a more comfortable option as compared to a two-wheeler.

Thankfully, nowadays loans are both readily available and at quite competitive rates of interest. Therefore, if your EMIs are manageable, car would be a preferred choice vis-a-vis a bike or scooter.

Having said that, it is very important that the entire process — of buying a car and availing car-loan — should be a 'financially' viable proposition. Else, you could end up needlessly straining your budget and creating stress for self and family.

Discussed below are some of the key ways to structure a good deal.

1. Don't go overboard with your choice of car
That you should live within your means, are timeless words of wisdom. You may desire to drive an Audi or BMW. But if your present financial situation does not support your dream car, you must tone down your expectations.

In other words, buy a car that you can afford. Or else your 'extravagant' purchase could become a serious liability. This, definitely, is not a very wise thing to do.

How do you decide your affordability?

Simple:
- All your current EMIs put together plus the new car loan EMI should not exceed 40-50% of your monthly take-home income if you are servicing a home loan.
- And, if you don't have any home loan liability, then the total EMIs should not exceed 20-25% of your monthly take-home pay.

car-loan


2. Don't look for maximum loan finance
Most banks and finance companies would be willing to offer 100% financing. The entire 'on-road' price would be paid by the lender. All you have to do is to sit in the car and drive away.

Stop!

The temptation, of not putting in even a rupee as upfront payment, is simply irresistible. Don't fall into such a trap. Make as much down-payment as possible from your own pocket. This will lead to a substantial reduction in your monthly EMI payout.

Suppose the on-road price of the car, that you would like to purchase, is Rs.10 lakhs.

Then, a 5-year loan @10% p.a. rate of interest for 100% financing (i.e. Rs.10 lakhs), would mean an EMI of Rs.21,250.

Whereas, a similar loan for 80% financing i.e. Rs.8 lakhs (Rs.2 lakhs as your own contribution), would mean paying Rs.17,000 as EMI. That's a cool saving of Rs.4,250 per month.

3. Don't look for longer loan tenures
Typically, you will get a car loan with 3 to 7 years tenure.

For a given loan amount and rate of interest, the EMI reduces as the loan tenure increases. This lower monthly payout lures many unsuspecting borrowers to opt for the maximum permissible loan tenure.

Beware!

Longer tenures may make the loans more affordable. But, you have to pay a 'heavy' price for this — in the form higher total interest outgo.

For example, a Rs.10 lakhs car loan @10% p.a. rate of interest with a 3-year tenure, would mean an EMI of Rs.32,270 and total interest payable of Rs.1.62 lakhs.

Whereas, a similar loan with a 7-year tenure, would lower the EMI to mere Rs.16,600; but increase the total interest payable to Rs.3.95 lakhs. That's a massive additional burden of Rs.2.33 lakhs.

If you cannot pay higher EMIs, you should try and pay higher down-payment and reduce the loan amount. That is a wiser option compared to increasing the loan tenure.

4. Don't forget to negotiate the 'other charges'
Interest is not the only cost that you have to pay while availing a car loan.

Most loans come with a variety of other charges such as processing fees, administrative costs, legal expenses, foreclosure or pre-payment penalty, advance EMIs, etc.

Make sure that you negotiate these charges so that you have to pay Nil amount, or as minimum as possible.

Concluding:
Strike the right balance between 'aspiration' and 'affordability'. That's the key to a car and car-loan that turns out to be a joyful ride.

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