You will come across car enthusiasts in every nook and corner of your city. Driving a vehicle is a dream for many, and people push their limits to own a car. We are sure that each of you on this page will have a dream car you would love to buy. If that is the case, then we are confident that you would have looked at the financial aspect of owning the car. When you are planning to buy a car, don’t just consider the car’s cost but also the insurance, maintenance, and fuel costs.
Today, most cars are sold via car loans, which helps people leverage the debt to own a better car. But what are the other aspects of a car loan? Are there any disadvantages of a car loan? You can learn more about the same in the section below.
🤔 What is a Car Loan?
A car loan is a debt issued by the bank for purchasing a car. The bank finances private and commercial vehicles. In addition, the loan is directly transferred to the dealer. A car loan is available for new and old cars, so you can get financing even when you buy a pre-owned car. You will not be able to use the car loan for any other purpose. The car loan is usually available at a low-interest rate, and to help you understand better, we have listed the advantages and disadvantages of a car loan.
👍 Advantages of Car Loan
There are many benefits of a car loan. We have listed them below.
- Affordability – The car loan makes the car affordable for you. You might not have all the cash at your disposal at a given point. So, the car loan would spread the cost of owning the car, and you will easily be able to buy the asset without depleting your savings.
- Better Car – In any case, you can afford a certain car, but the car loan helps you buy a better car without worrying about finances. For example, if you had to spend ten lakhs on a car but if you increase the tenure of the loan to 8 years, then you will be able to spend more by keeping the EMI the same.
- No Down-payment Required – Many banks offer 100% financing for their cars. There is no down payment required for the car; hence, if you don’t have any cash at your disposal, that is also fine. You will still be able to own a car. This scheme is also very attractive for car owners.
- Improves Credit Score – Car loans are for the long term and add a variety of loans to your portfolio. This is an excellent advantage for your credit score. Assuming that you will not miss any EMI on the car loan, it will drastically improve your credit score.
- Pre-Payment – Many banks and financial institutes allow the pre-payment of a car loan. This comes at no extra cost. Especially in the case of government banks, you can make a part payment or pre-payment, and you would not have to give any extra money for the payment. This is the best part about getting a car loan from a government bank.
- Low-Interest Rates – The interest rates for a car loan are much lower than for a personal loan. If you think that the interest rates will rise in the future, you can even get a car loan at a fixed interest rate instead of a floating interest rate.
- Depreciation Benefits – If you buy a car for the business, you can also get depreciation benefits. A car is a depreciating asset, and the depreciation can offset your taxes. A car loan enables you to buy a car, indirectly offering depreciation benefits. In addition, the interest expense is also deductible for a business.
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👎 Disadvantages of Car Loan
Before taking a car loan, check the drawbacks too.
- Increases Cost of Ownership – A car loan will help you afford the car, but it still shoots the cost of ownership. You pay the interest component every month, which is usually the highest in the initial few years of the ownership. So, if you look at the calculation sheet of the amortisation schedule, you will realise the magnitude of the increase.
- Hypothecation – If you avail of a car loan, you will notice that the car has been hypothecated to the bank. You will have to transfer the ownership after the loan has been closed, but this is certainly a drawback of having a car loan.
- Risk of Default – If you don’t have a stable income, you risk default. This will impact your cibil score, and the bank will recover your car to offset losses. This is why you should carefully plan the car purchase and ensure you don’t risk defaulting on the car loan.
Should I Take a Car Loan or Buy in Full Cash?
We have listed the advantages and disadvantages of car loans. You can leverage the car loan to afford a car that would otherwise be beyond your reach. In addition, you would need to ensure that you are not exceeding the budget when planning for the interest. Most importantly, try to make more down payment because the car loan for pre-owned cars can have very high-interest rates. Lastly, today it is possible to avail car loan for a tenure of up to 8 years. We recommend restricting the duration to 5 years, as this would keep the interest cost in check. You can take a car loan and set the variables to the optimal level based on all these factors.
Car Loan Frequently Asked Questions
Q1. Is It Possible To Get A Car Loan With A Salary Of 20K To 30K Rupees?
Ans: Yes, you can. The bank just wants to make sure that you have enough money to make your monthly payments and with that salary, you’re good to go. Of course, the loan amount and interest rate offered might vary based on other factors, but the important thing is that it’s possible!
Q2. Do Banks Provide 100% Funding When Applying For A Car Loan?
Ans: When it comes to car loans, banks usually don’t provide 100% funding, but that’s okay. A down payment is actually a good thing! It shows the bank that you’re serious about making the loan work and that you’re putting your own money on the line.
Q3. How Long Does The Car Loan Approval Process Take?
Ans: The car loan approval process is a bit like a race, the quicker you get all your documents in order, the faster you’ll get your loan approved! Usually, it takes a few days to a week, but some banks can approve loans in just a few hours.
Q4. What Will Happen If I Miss Any Car Loan EMI?
Ans: Well, in that case, banks may charge a late payment fee and it can also affect your credit score. If you miss EMI payments repeatedly, the bank may even repossess your car. So, make sure to make your payments on time and keep your car ownership dreams alive!
Q5. Is It Possible To Get A Car Loan For A Used Vehicle?
Ans: Yes, you can still get a car loan for a used vehicle! The loan amount and interest rate offered for a used vehicle might be lower compared to a loan for a new vehicle, but it’s still an option.
This was all about the car loans. Before you apply for a car loan, ensure that you check the interest rates and the pre-payment term of the car loan. This will help you select the financial institution you want to get the car loan from. The exact list of documents required to get a car loan will be shared with you by the dealer, depending on your source of income.
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