MintGenie explains: Key things to keep in mind before applying for a car loan

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An RBI report dated July 1, 2021 shows encouraging growth in the personal loan category, particularly home and vehicle loans. Additionally, auto loan growth has exceeded pre-COVID-19 levels for public and private banks, the report adds.

Now an individual can own the car for just a fraction of the cost and pay the rest through EMI over a period of time.

Although there are a variety of options available, there are still some checks and balances that an individual must go through in order to get a car loan.

READ MORE: Is it prudent to opt for a fixed rate car loan in the scenario of rising interest rates?

Eligibility

In order to obtain a car loan, the first thing to do is to check the car loan eligibility criteria of the bank of your choice. These include minimum age, minimum annual income, employment status and/or any other criteria the bank may have.

For example, in Axis Bank, for a salaried person, the minimum age should be 21, the minimum annual income should be Rs. 2.4 lakhs and should be employed for at least 1 year, while for a worker self-employed, minimum age is 18, minimum annual income is Rs. 1.8 lakhs – 2.4 lakhs and must be in the same line of business for at least 3 years. Similarly, one can check the eligibility criteria of their respective banks.

Verification

If you qualify for a car loan, the next step is to verify your identity. To do this, you need to submit to your lender proof of identity which could be PAN, passport, Aadhar card, voter card as well as proof of address which could be utility bills or bank books.

READ MORE: Thinking of getting a car loan? Analyze these 6 factors first

Apart from these, you also need to submit other basic documents. These include:

Application form– To apply for a car loan, one must complete the application form requesting the same.

KYC– This process requires the applicant to further submit their photographs, Proof of Identity (like Aadhaar Card etc.), Proof of Address (like Aadhaar Card, Driving License etc.) and Proof of age.

Bank statement– Applicants must submit their bank statements for signature verification.

proof of income– For an employee, the bank requires the last pay slip or form 16 to be submitted. For a self-employed person, the proof of income will be the income statement for the last 2 years.

Other documents– Some banks may also require proof of employment stability for employees or proof of business ownership for the self-employed.

credit history

This is a very important aspect for obtaining any type of loan. This reflects your financial stability and gives your lender a clear view of your financial history. The credit score describes the creditworthiness of the applicant and is based on a number of factors, for example, the number of open accounts, the total level of debt and the repayment history, etc. Lenders always check credit score to assess Applicant’s ability to repay loans.

Credit score is numbered between 300 and 850, and the higher the score, the higher the chances of your loan application being approved. It also helps determine your interest rate for the loan. The higher the credit score, the more you can negotiate a lower interest rate with your lender.

Driving license

If you are applying for a car loan, you must have a valid driver’s license. This shows that you are legally allowed to drive before owning a car. Your car loan can be canceled if you have lost your license, or if it has expired or been cancelled. The lender must verify that you are a responsible driver before approving the car loan.

car type

The type of car you want to buy also determines car loan eligibility. Since the value of a car depreciates over time and every car has an estimated resale value based on features and specifications, the resale value of the car also determines car loan eligibility. Therefore, the higher the resale value of the car, the higher the eligibility for the car loan.

Your employer’s reputation

This doesn’t always affect eligibility, but sometimes the brand and company name helps improve car loan eligibility. An employee of a high-ranking company or a Tier 1 company may be able to receive a higher loan amount than an employee of another company. So, to get a higher loan amount approved, it is important to have a higher income.

Although these are the basic checks that are done before a lender approves a car loan. There are certain things that the applicant should keep in mind before taking out a car loan.

1) It is very important to compare interest rates, EMIs and other associated costs between lenders. Don’t settle for your first option. Buy competitive rates and choose the one that suits you best.

2) If you have a spare corpus then it is advisable to pay as much as possible in the deposit. While most car manufacturers only require 10% of the total vehicle cost as a down payment, your loan amount, as well as the interest incurred, will decrease significantly if you pay 25-30% of the vehicle cost as a down payment.

3) Lenders generally offer a term of 1 to 7 years for the repayment of a car loan. But the shorter the term of your loan, the less interest you will be charged.

This story was first published on MintGenie and accessible here.

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