With an increase in per capita income, better roads and a nuclear family, owning a car has become a necessity than a luxury. A car loan makes the affordability much easier to own a dream car. A car loan or auto loan is a sum of money a consumer borrows with 10 to 15% margin money to purchase a car, and the borrower agrees to pay back the full loan amount, as well as the interest by a specific date, typically by making monthly payments.
A car loan can be availed by the below-mentioned individuals/entities:
- Salaried individuals
- Self-employed sole proprietors
- Self-employed individuals/professionals at – partnership firms or the partnership firm
- Self-employed individuals/professionals who own private companies or the Pvt ltd company
- Self-employed individuals in public-limited companies including directors or the public ltd company, Trust and Society.
The age group for availing credit facility is in the range of 18-65 years. The maximum age of 65 should be at the time of maturity of the loan. The risk associated with higher age factor can be mitigated by adding one or more younger generation individuals as co-borrower or guarantor to the loan structure. The loan also can be borrowed in blood relative name with co-borrower’s financial strength and repayment capacity.
Turnaround time, in short TAT, is the time required for the lender to process the loan application. TAT starts from the login of the file and ends with loan disbursement. Car loans fall under consumer loans, and new car loans are approved in 2 to 3 days. If it is a pre-owned car that is used car finance, the approval process involves the valuation of the car through an independent valuer. This takes another 2 to 3 days to complete.
All new car loans are generally offered anywhere between 24 and 60 months, although few lenders offer 84- or 96-months tenure. Car loans having repayment period more than 5 years are offered with a minor higher rate of interest. Used Car or Pre-owned cars loans are offered to a maximum of 5 years or remaining useful life of the car, which is earlier. The maximum age considered is 10 years inclusive of the loan tenure.
Car Loan is based on the value of the asset and income eligibility. One can get up to 100% finance of the ex-showroom value of 90% of the on-road price of the car. There is no upper limit of the loan amount one can avail.
The repayment of the loan should be made according to the repayment schedule of the lender through banking mode. A lender and borrower can agree on the repayment mode according to convenience. Repayment of EMI can be made through NACH, ECS or SI. The lender set the repayment mode for each loan account to ensure automatic repayment on a specified date. If payment is not cleared through the set process, it is termed as default in payment. The lender generally collects un-dated PDCs for security purpose and may present whenever EMI get bounced or to take legal steps to recover the outstanding loan.
Eligibility, Rate of Interest and Charges
The eligibility of a CL depends upon various factors, including the following important ones:
- The income of applicant – Rs 25,000 salary for a salaried and annual income of Rs 3 Lakh for a self-employed
- The credit score of applicants
- Car model and value
- Income and creditworthiness of the co-borrower or guarantor
- For car value above Rs 15 Lakh, the previous owner of the car or car loan history is required.
- Other non-financial information
Individuals in Businesses having established more than 3 years are considered stable and are preferred by lenders. An individual in business less than 3 years need to proof total experience of 3 years to be eligible for a Car Loan.
Recent loans taken affect the creditability of the customer in two way first decrease in credit score if there are multiple Enquiries but few disbursements and second low or no financial eligibility. Recent loans in the sense that loans are taken in the last 6 months. It indicates that customer is credit hungry unless proper justification of the end-use of the recent loan is given. There is no restriction on the number of recent loans taken provided there is financial eligibility and customer has justified the purpose of the recent loans.
Rate of Interest is positively correlated with the risk involved in the lending. The other guiding factors which govern the rate of interest are Credit Score, Loan amount, Tenure, Risk Profile of the borrower, Scheme, etc. New Passenger car loans are offered with Rate of Interest of 8.5% to 12% depending upon model and are offered as a fixed interest rate. Used Car loans are available with a rate of interest varying from 12% to 18%. Here, the Rate of Interest is also affected by the value of the car and how old the car is.
The charges for availing loan may include initial Login fee, Processing fees, documentation charges, stamping, affidavit and Notary fees etc. Certain charges like Documentation Fee, affidavit and Notary fees are absolute figures, whereas Processing fee is a percentage of the loan amount.
Documentation, stamping, affidavit and Notary fees put together ranges from Rs. 1,000 to Rs. 5,000 and Processing fee ranges from 0.50 to 2% of the loan amount. The borrower bears all these charges. The borrower either pays upfront or the same is deducted from the loan amount.
Loan to value is the ratio of Loan Amount to Collateral Value. This concept is the key factor for all types of secured loans. LTV for passenger car loan ranges between 85% to 100% of the cost, which may be Ex-Showroom or On-Road cost. In the case of used vehicle finance, LTV is between 60 to 90% of the market value of the car.
Multiple business entities having common promoters, income from those entities can be combined to get higher eligibility. The lender may insist on taking all the entities considered for eligibility calculation as parties to the loan structure.
In the case of Used Car Loan, the ROI is higher than the new car. Again, ROI for an expensive car is further low as compared to entry-level cars. Such variation in the rate of interest is due to the quality of collateral and the risk profile of the borrower.
Existing Loans are part of credit decision making. The lender verifies the repayment track of existing loans and the impact of existing loans ineligibility. There are no restrictions on having multiple loans as long as the borrower is still eligible for a further loan. However, lenders prefer to evaluate such borrowers more stringently than a borrower with fewer loans.
Purpose, Usage, Benefits, Disadvantages
Car loans are “No Cash Out” products. The borrower does not get any funding. The lender disburses the loan amount to the dealer in case of new car and seller in case of used car. However, in top-up or Car PL, the fund is disbursed to the borrower and borrower can decide the way to use the fund.
Buy now, pay later: Car loan made it easy to afford one desired car without looking into a bank account. The repayment is made in easy monthly installments, which does not make a significant dent on one monthly cashflow.
If the car is used for personal purpose and the loan is in the name of an individual, the interest paid cannot be claimed as deduction or exemption under the Income Tax Act. If the car is bought for the exclusive use in the business and the loan is taken in the business name, the interest paid is allowed as a deduction under section 37(1) of income tax Act. Depreciation benefit also will take if the car is purchased in firm name and repayment from the firm account.
Interest and fees: Like any other loan, interest and fees are part of car loan too, which adds up to the cost of owning the car. Further, even pre-closing the loan also attracts a penalty.
Risk of default: In case of a temporary cash crunch situation, missing payment of instalments leads to seizure of the car and damaging credit score.
Depreciating asset: Car is a depreciating asset, and the value diminishes over the years, even not driven. Interest outgo and diminishing value make the loan a costlier affair if the car is not used enough.
The borrower of a car loan is decided based on in whose name the car will get registered. The owner of the car could be an individual or an entity. Hence, there is no restriction on whether an individual or a business can be borrower, as long as the ownership of the asset is established. Repayment will be from financial applicant/co-applicant.
Products & Schemes
With the growth of the economy, car loans have become off the self-products. Lenders have made unique standardized schemes to cater to different segments of borrowers. It is critical to know the schemes to get the most benefit. Aagey.com, with its rich experience and extensive studies has developed proprietary algorithm which analyses 1,000+ schemes offered by 75+ lenders to bring the best fitment possible. Few of the schemes are:
- Income to Obligation method
- Based on the transaction and average balances maintained in the accounts. Lenders expect 1 to 2 times of the proposed EMI as an average balance to be maintained in the account.
- The perceived margin of the industry to which the borrower belongs
- based on monthly GST returns filed
- Rental income with proof of rental receipts
- Funding a limited portion with an assumption, the borrower would honour the obligation considering the value of the assets.
Based on existing car loan repayment habit
Top up is the loan facility given by the lender based on servicing of an existing loan.
If a Car Loan borrower has paid 9 to 12 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called top Up or Car PL and is subject to verification of income documents, re-valuation of the co-lateral and other eligibility criteria laid down. Such loan amount can be used for any purpose, and the lender blocks the NOC on the car till such time the top-up loan is fully repaid. More aggressive funding option available with 2 years of prompt repayment, makes the borrower eligible for a gross loan of 150 to 175% of the current market value of the car.
Non-resident Indians holding Indian passport can be sanctioned Car loan. Even PIO (Person of Indian Origin) and OCI (Overseas Citizen of India) possessing a foreign passport can also be sanctioned a Car Loan. Very few lenders have come forward to lend car loan to NRI/PIO/OCI and while sanctioning loans to NRI/PIO/OCI, the following conditions will be taken into account:
- The NRI/PIO/OCI needs to find the resident Indian, who could be a borrower and in whose name the car to be registered
- The NRI/PIO/OCI to stand as guarantor and based on his financial strength loan will be sanctioned
- The NRI/PIO/OCI should be signing an application and other documents when he/she visit India.
- Repayment of the instalment to be made from the NRE/NRO account
- Both the applicant (resident Indian) and the guarantor (NRI/PIO/OCI) should be in the age group between 18 and 65 years
Ex-showroom price is the price of the car, including GST but excluding local duties and statutory charges. On-road, price is the price you pay for the car, including the ex-showroom price and cost of registration, insurance, municipal entry tax, road tax and any accessories. The on-road price tends to be 15-25% more than the ex-showroom price and may vary from city to city.
In-car loan, the car is the security and is hypothecated to the lender till the loan is fully repaid along with interest. Hypothecation gives the right to the lender to seize the asset, in case the borrower does not pay the EMI on time.
The hypothecation letter is a part of the car registration papers. Once the borrower has paid all the EMIs, hypothecation is removed. Hypothecation can be removed by visiting the Regional Transport Office (RTO) along with documents such as No Objection Certificate (NOC), car insurance papers and address proof.
Foreclosure or Pre-payment is the process when one repays the loan before the loan tenure ends. Foreclosure of loan comes with penal charges depending upon the number of EMIs paid. Shorter the EMI servicing period, higher the penal charges. Foreclosure charges range between 2% to 5% of the outstanding amount. Minimum EMI servicing period to be eligible for foreclosure is 6M to 12M depending upon the policies of each lender.
Car Loan is called as “No Cash out Loans”, that means the lender does not disburse any fund to the borrower, rather the disbursement amount gets credited to the dealer’s account directly. If the borrower wishes to close existing loans, he has to do so from his fund. Closing existing loans with less than 12 months remaining helps in getting higher eligibility. This option is helpful while taking a second car loan and closing the loan outstanding on the first car loan.
If borrower has sufficient funds, but not enough to pre close entire loan amount, then part payment option can be considered. Such payment brings down the EMIs and the total interest paid and to be paid. This is a cheaper and effective way to save on the interest outgoing during the tenure of the loan. Generally, part payment of Car Loan is not allowed by any of the lenders. One has to either make full payment or continue paying the periodic EMI. Some banks accept part pre-closure once in a year for a salaried customer without charges.
If the borrower is facing a temporary liquidity crunch, may apply to the lender for extending loan tenure so that EMI burden can come down. However, tenure extension may amount to “Debt Restructuring” as per RBI guideline. Such instance is not widely practiced in Car Loans unless there is a drastic change in external economic condition. As of now, no policy available for the same.
Generally, when a loan is sanctioned and disbursed, the loan file is kept safely with the lender as they need to preserve them and refer them till the loan is running. But if the loan application is rejected, the document submitted is destroyed. The documents once collected cannot be given back to ensure these documents are not misused. Still, there may be possibilities of misuse of the documents. The best way to protect one from any fraudulent activity is to scribe “Submitted to XYZ Bank for Loan Application” on each and every document submitted.
A fall in Turn Over or Profit or both affects the eligibility prospect. However, lenders may consider funding based on general industry trend; recovery is shown in last 3 to 6 months or appropriate reason justify such fall may not be considered as risky.
One can apply for a loan jointly with a co-applicant (either your spouse or your parents). This helps the borrower to increase eligibility as the co-applicant’s income also gets added to the borrower income.
If the borrower fails to pay the loan on time, then it will also affect the co-applicant. Default in the loan will affect his/her credit score as well. The lender may also approach the co-applicant for the repayment of the loan.