If you are planning to buy a car and are worried about financing options, a car loan can be a great solution. However, to make the best decision, it’s essential to understand the entire process, from eligibility requirements to interest rates and hidden charges. Here, we will walk you through everything you need to know about car loans in India, using SBI, India’s largest bank, as an example.
What Is a Car Loan, and How Does It Work?
A car loan is a type of auto loan you can take from a bank to finance your vehicle. Simply put, the bank lends you the money to buy a car, and you repay the bank through monthly EMIs (Equated Monthly Installments). During this period, the car acts as collateral, meaning the bank has a legal claim on your car until you pay off the loan fully. If you miss EMIs, the bank has the right to sell your car to recover the loan amount, although banks rarely do this.
Car Loan Eligibility
To get a car loan, you need to meet certain eligibility criteria:
- Salaried Employees: Annual income should be at least ₹2 lakh.
- Self-Employed Individuals: Income Tax Return (ITR) should be a minimum of ₹3 lakh.
- Individuals in Agriculture: The minimum ITR requirement is ₹4 lakh.
If you don’t meet these requirements alone, you can apply with a co-applicant whose income will be added to meet the criteria. The age limit for applicants is between 21 to 70 years.
Types of Car Loan Customers
SBI divides car loan customers into two categories:
- New Customers: Those who have not previously taken a loan from SBI.
- Existing Customers: Those who have an existing loan with SBI. They may receive special benefits under SBI’s loyalty scheme, especially if they are home loan customers.
Loan Amount and Financing
The amount you can borrow depends on factors like your income and the car’s price. Typically, banks fund up to 90% of the car’s on-road price (the cost including RTO fees, insurance, and other charges). SBI, however, offers up to 85% financing for eligible customers.
- Salaried Applicants: Can get up to 48 times their monthly salary as a loan.
- Self-Funded Portion: You will generally need to arrange 10-15% of the cost yourself, which shows your commitment and helps banks avoid losses due to the car’s depreciation.
Fixed vs. Floating Interest Rates
Banks offer two types of interest rates for car loans:
- Fixed Rate: The interest rate remains the same throughout the loan tenure.
- Floating Rate: The interest rate changes based on the RBI’s repo rate.
It’s usually wiser to opt for a floating rate, as RBI’s current repo rate is at a peak. When the rate drops, your interest will likely decrease as well, leading to savings on your EMIs.
Interest Rates and Charges
Car loan interest rates for secured loans, such as SBI’s, start from 9.15% for those with a CIBIL score above 800. Rates are higher for lower CIBIL scores (e.g., 9.65% for a score of 750). Additionally, SBI and most other banks charge processing fees:
- Up to ₹5 lakh: ₹750 + GST
- ₹5–10 lakh: ₹1250 + GST
- Above ₹10 lakh: ₹1500 + GST
Foreclosure and Prepayment
If you decide to close your loan before its tenure, SBI imposes a foreclosure charge of 2% if you repay within two years. If you wait until after two years, you can prepay without any charges. This can help you save significantly on interest costs.
Foreclosure charges vary between lenders, so it’s a good idea to compare them for a clear understanding. Some lenders may even offer zero foreclosure charges.
Choosing the Loan Tenure
SBI offers car loans with tenures of up to 7 years. However, it’s generally advisable to limit your loan tenure to 4-5 years, even if the bank offers a longer term. Unlike home loans, car loans don’t provide substantial tax benefits. The only exception is electric vehicles, where you can claim a tax deduction of up to ₹1.5 lakh on the interest under Section 80EEB.
Disbursement and Repayment
The disbursement process is straightforward: once the loan is approved, the bank directly transfers the funds to the dealer, and you begin repaying via EMIs.
Secrets to Get the Best Car Loan Deal
1. Avoid Dealer Financing
When you visit a car dealership, they might offer dealer financing options, claiming you don’t need to go anywhere else. Dealer finance usually costs more, as dealers often charge higher interest rates to earn commissions from partner banks. It’s generally cheaper to approach the bank directly.
2. Compare Bank Offers
Always compare offers from multiple banks. While SBI’s rates start at 9.15%, other banks like PNB may offer slightly lower rates. Collect loan offers from at least three to four banks, compare both the interest rates and processing fees, and try to negotiate for the best deal.
Conclusion
Getting a car loan can be a smooth process if you know what to look for. By understanding your eligibility, comparing loan offers, and choosing the right tenure, you can secure a loan that best fits your financial situation. Remember, a car loan is a significant commitment, so choose carefully and make sure to plan your finances accordingly.