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Car Loans - Things You Must Know
Car Loans make Car Ownership easy
From being a luxury owned by the rich, cars have become a necessity even to the middle class of society. This dream of owning a car has become a reality with the availability of car loans. As there is no necessity to make the entire payment at the time of purchasing, owning a car has been made easier.
Car loans make up for a great section of the loans selling in the market with a rise in demand for cars.
Real Cost of the Loan
When applying for a car loan, the most important thing that one should take into consideration is the rate of interest. There are two kinds of rates while getting a car loan are the rack rate and the actual rate. The rack rate is an estimated rate of interest set by the lender that is about 12-14%. But with the adjustments made between the lender and seller for cars financed through loans the rate of interest is bound to come down which is the actual rate. This benefits the buyer as the benefit is enjoyed at a lower cost. Thus, loan seekers should always check for the actual rate of interest to get the best deal on a car loan.
Limit for a Car Loan
While giving a car loan, the lenders take several aspects into consideration to determine the amount that can be sanctioned. Knowing this amount is necessary for the borrower as a certain percentage of the amount needs to be shelled out from one's own funds.
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1. | Cost of the Car
The cost of the car has a bearing on the amount that a person would require to put form his or her own funds
while buying the car. The higher the rate of the car the more the individual will need to arrange for depending on
the percentage of the price of the car sanctioned by the lender. If the lender finances 80% of the value of the car,
the individual would require to gather the remaining 20% in order to realize the dream of owning a car.The
sanctioned percentage also determines the EMI to be paid over the next few years as
a part of repayment of the loan.
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2. | Ability to Repay
The lending institution, while granting a loan makes sure that the availed loan is within the means of the borrower
and only a certain section of the income is covered for repayment. This is to make sure that there is no strain on
the individual's income and the ability to repay is not in question. By taking the income of a person into
consideration for a loan, the financer ensures that the EMI can be paid without any real hassles.
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3. | Purpose of the Car
The purpose of the car is an essential aspect that is looked upon by the lenders while granting car loans. This is
done to determine the kind of loan to be given and the percentage of the cost to be sanctioned. It also affects the
amount that will be disbursed through the loan. A loan for a car meant for personal use brings greater gains for
an individual than that for other reasons.
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Duration of Repayment
The EMI for repaying the loan is calculated based on the duration for repayment. The greater theduration for repayment the lesser the EMI amount and vice versa. Car loans are normally fixed for aperiod of around 36 months or 3 years to a maximum of 84 months or 7 years. In case of situations where the EMI does goes beyond the percentage of income for the EMI, certain adjustments are made to make the facility available. Extending the duration of repayment to a certain extent can extending the duration of repayment to a certain extent can help to reduce the EMI and make the loan available.
Rate of Interest
The interest rate together with the loan amount availed is necessary to determine to effect of the loan taken. The method used in calculating the interest affects the repayment pattern and the cost of the loan
Discounts
Financing a car through a loan brings down the rate of the car with the various adjustments madebetween the lender and the seller. This is beneficial as it brings the car to an affordable price.Thediscount received on the car helps in assessing the reason for the lower cost at the time of purchasing.
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Manufacturer's Discounts
In order to push cars that are not in real demand in the market and to ensure larger sales of certain models,
manufacturers offer discounted prices on certain models of cars. The benefit for the buyer in this situation is the
lower cost of attaining the car. This kind of discount may not be offered on all models.
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Dealer Discounts
To go with the discounts offered by the manufacturer, a buyer can also benefit from the discounts offered by
dealers. Dealers are willing to offer discounts on cars, making the car even cheaper and more affordable for the
buyer. With these discounts the buyer is put at greater ease in purchasing a car.
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Festive Offers
Everybody looks for the right time to buy something and what better way to lure someone into taking a loan than a
festive offer. Lending institutions cash in on the festive seasons tosell their services by offering further
discounted rates on loans making a car loan all the more cheaper.
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Special Schemes for Repayment
Loans for cars come with various schemes of repayment. It is important to understand these
schemes so that while choosing a particular scheme the right decision is made after total
understanding.
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Bullet Repayment
This scheme of repayment is for those avail a loan for a higher priced car and may find it difficult to pay a large
sum as an EMI over a period of time. For this purpose, the EMI amount is reduced to suit the means of the
individual. A bulk amount is scheduled as an end payment that is called the bullet payment. This helps the
borrower to pay at his convenience and arrange for a larger amount to clear off the debt right at the end.
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Increasing Installment
This is a scheme that allows an individual to plan based on future earnings. The repayment in this scheme begins
at a lower EMI and gradually increases. Individuals can plan for such payments based on the estimated levels of
income in the years to come.
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0% Finance
0% finance is one of the most attractive schemes on offer while availing a loan. The term 0% draws people
towards this kind of a loan with the belief that they can enjoy the benefits without having to pay a cost for it. If a
reality check is done on this offer, people will realise that it is not exactly what it is assumed to be. The interest
rate that is not laidout directly is made up for in other some other form. This could be in charges for availingthe
loan and discounts offered on the car. The percentage of financing will also be less andthe individual will need to
make a greater initial payment to purchase the car. The benefitenjoyed from this type of loan is no more that those
that come with an interest charge. To get the real status on the difference of amounts to be paid, one needs to
closely compare it with other offers.
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Effective Management of a Car Loan
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Determine the actual rate rather than the rack rate.