Commercial Vehicle Loan

Lenders offer commercial vehicle loan to a broad range of customers to meet their business needs. Below is the list of the consumers considered to be eligible for this loan:

• Individuals
• First-time users and buyers acting a proprietorship concern only for captive purpose with a higher margin
• Small, medium and large-sized fleet owners
• Proprietorship firms and Partnership firms
• Public Limited & Private Limited Companies
• Trusts and societies running educational institutes or healthcare facilities

Refinancing is a loan on a commercial vehicle, where the lenders either offer a loan on an existing vehicle which is loan free or takes over existing commercial vehicle loans and provide additional finance. In such case, the borrowers either can reduce the monthly EMIs of their existing loan and free up some cash by refinancing an existing loan at lower interest rates, or can get finance on their free vehicles to meet the working capital needs or margin for buying new vehicles.

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.

A vehicle loan is generally sanctioned in 4 to 5 days. In the case of used vehicle finance, the approval process involves the valuation of the car through an independent evaluator. This takes another 4 to 5 days to complete. Pre-owned commercial vehicle finance amount will be released only after the ownership changed with hypothecation favouring concerned bank endorsed in the RC book and insurance copy.

Commercial vehicle loans are Commercial vehicle loan offers tenure of 3 years to maximum 5 years. Old vehicles tenure could be up to remaining life, or 4 years whichever is lower.

Commercial Vehicle Loan is based on 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 vehicle (that is chassis) and up to 85% of the body. There is no upper limit of the loan amount one can avail, but it observed lenders are comfortable with a loan amount below Rs. 3 Crs on single disbursement with or without multiple vehicles.

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.

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 Commercial Vehicle 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 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. Vehicle loans are offered with Rate of Interest engaging from 10% to 14% depending upon the classification of the vehicle like LCV/HCV, etc., model and are offered as a fixed interest rate.

Used Vehicles also can be refinanced, and the rate of interest varies between 14% to 18%. Here, the Rate of Interest is also affected by the valuation of the vehicle and usable life of the vehicle.

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 2 to 4% 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 commercial vehicle 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 less than 80% of the market value of the vehicle.

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 Vehicle Loan, the ROI is higher than the new vehicle loan. Further, vehicles used in hazardous conditions or carrying hazardous material may get a higher rate of interest and lower tenure. Such variation in the rate of interest is due to the quality of collateral and the risk of the asset subject to.

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.

Flexible repayment tenure: Usually, the repayment tenure offered in commercial vehicle loan is up to 5 years. This ensures a low EMI amount to the borrowers enabling them to pay off the EMIs without any undue financial burden.

Multiple vehicle financing: Whether you are an individual borrower or a fleet owner, you can get finance for a variety of vehicles such as tippers, trucks, buses, trailers, tankers, and other small and light commercial vehicles to grow your business.

Easy processing: The process of applying for a commercial vehicle loan is easy, fast and convenient. After the submission of all the required documents, banks usually take 4-5 days to process a new vehicle loan application.

Simple documentation: Commercial vehicle loans come with a hassle-free and quick documentation process.

Relaxed credit score compulsion: Unlikely other loans, borrowers having a low credit score can avail a commercial vehicle loan with ease.

Caters to multiple needs: The loan schemes are designed to cater to the borrowers’ diverse requirements including new and used vehicle financing, top-up on existing loan and refinancing of loans/vehicles for working capital.

 Customized solutions: To meet the requisites of the customers, every commercial vehicle loan scheme is altered according to the vehicle type, duration of the loan and financial ability of each borrower.

One can claim a tax deduction on the interest charged on the vehicle loans as the loan is invariably used for business furtherance. The tax benefits also extended to the associated fees and charges incurred while taking the loan or keeping the loan. Interest, as well as the payables, can be claimed as business expenses under Section 37(1) of the Income Tax Act. There is no relieve on the principal repaid.

Interest and fees: Like any other loan, interest and fees are part of commercial vehicle loan too, which adds up to the cost of owning the vehicle. 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 vehicle and damaging credit score.

Depreciating asset: Vehicles are depreciating asset, and the value diminishes over the years. Interest outgo and diminishing value make the loan a costlier affair.

The borrower of a commercial vehicle loan is decided based on in whose name the vehicle will get registered. The owner of the vehicle 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.

Commercial Vehicle loans can be classified into 3 categories:

• New commercial vehicle loan: commercial vehicle loans provided for the purchase of new commercial vehicles for business purpose. Lenders offer up to 100% funding on the chassis. Some of the lenders provide additional funding for the body construction of the vehicles.
• Old commercial vehicle loan: Old or used commercial vehicle loan is offered to purchase all makes of pre-owned or used commercial vehicles. Borrowers can expect to get finance against old vehicles which are up to 15 years old. Most of the banks provide up to 80% funding on the used vehicle’s value or depreciated value.
• Commercial vehicle refinancing: Lenders either offer a loan on an existing vehicle which is free of loan or takes over an existing commercial vehicle loan and provide additional finance for it based on eligibility.

A parallel loan is a loan facility given by the lender based on servicing of an existing loan.

If a commercial vehicle Loan borrower has paid 9 to 12 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called Parallel Loan 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 NOC on the vehicle is blocked until such time the top-up loan is fully repaid.

Ex-showroom price is the price of the vehicle, including GST but excluding local duties and statutory charges. On-road price is the price one pays for the vehicle, 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. Road Tax is either paid quarterly or annually.

In-vehicle loan, the vehicle 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 acquire the asset, in case the borrower does not pay his 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), insurance papers and address proof.

Vehicle 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.

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 easy, but an effective way to save on the interest outgo during the tenure of the loan. Generally, part payment of vehicle Loan is not allowed by any of the lenders. One has to either make full payment or continue paying the periodic EMI.

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 practised in Commercial Loans unless there is a drastic change in external economic condition. As of now, there is 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, then 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.