5 Mistakes To Avoid While Applying For A Car Loan

As many carmakers continue to hike car prices, you need to look out for appropriate car finance. Also, one should weigh the pros and cons before opting for a car loan.

Outlook Web Desk

Updated on: 17 December 2021 3:38 am

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5 Mistakes To Avoid While Applying For A Car Loan

The India car loan market is forecast to grow at a compounded annual growth rate (CAGR) of over 8 per cent in value terms to reach $60 billion by FY2026, according to a recent research report by TechSci Research. The brisk growth rate is expected to be on the account of growing disposable income and increase in purchase of electric vehicles. The shift from combustion engine vehicles towards electric vehicles, product launches, subsidies offered by the government on the purchase of electric vehicles, and high vehicle replacement rate are promoting sales of cars across India, which is consequently boosting the India car loan market.

Many companies in India offer car loans, including banks, original equipment manufacturers (OEMs), and non-banking financial companies (NBFCs). Also, the presence of NBFCs in non-metro or rural areas has helped in increasing the market share of car loans.

Hence, owning a car has now become easier with lenders offering competitive interest rates and flexible loan tenures.

As many carmakers continue to hike car prices, you need to look out for appropriate car finance. However, as it is with every kind of loan, one should weigh the pros and cons before opting for a car loan. When you understand how a car loan works, you can avoid mistakes and opt for a suitable car loan.

5 Mistakes To Avoid

Borrowing more than you can afford

It is very exciting to be able to finally own a new car, and it is natural to want to buy the best car that fits your needs. However, it is essential that you do not go overboard in your enthusiasm and borrow more than what you can comfortably repay. “Too big a loan can mean financial stress and a higher chance of default. Do first calculate the amount you can pay every month and base your loan amount on that. Then choose a car that fits in that budget range instead of going the other way round,” says Adhil Shetty, CEO, BankBazaar.com.

Picking the wrong loan tenure

Remember to use your EMI calculator to choose your loan tenure. Typically, a car loan tenure ranges between 1 and 7 years, depending on the kind of loan you choose. A short loan tenure would mean higher EMIs, but you pay off the debt in a shorter time. A long loan tenure would mean smaller EMI payments, with a higher overall interest payment.

Not factoring in your credit score

The car loan interest rates are directly related to your credit score, and you may be charged a significantly higher rate of interest if your credit score falls short of the mark. Moreover, it may as well limit your choices of lenders and offers. So, keep an eye on your credit score and make sure you have a clean record.

Not comparing different lenders

It is very important to compare the terms and conditions, interest rates, tenor, speed of approvals, service, and other factors before making a decision. “Factors such as hidden costs and charges, pre-payment penalty, penalty on pre-closure of the loan, etc., can make a huge difference to the cost of your loan,” says Shetty.

Not reading the fine print

Having a clear understanding of the terms and conditions of the loan is essential if you want to avoid nasty surprises down the line. So, make sure you read through the agreement in detail and understand the clauses before signing anything. If there are any doubts, please clarify them with your lender.

When you opt for a car loan, you need not dip into your long-term savings like fixed deposits as banks offer lucrative loans. Hence, it makes sense to check out all pros and cons and then decide on your loan to buy your favourite car.