Decoding Car Loans Offered by Banks in India: A Comprehensive Overview

The Indian automotive industry has witnessed remarkable growth in recent decades, fuelled by urbanization, rising incomes, and changing lifestyles. As the desire for car ownership becomes more widespread, financial institutions, particularly banks, play a significant role in fulfilling this aspiration through car loans. Car loans offered by banks in India have revolutionized the way individuals access vehicles, making them an essential financial tool. This comprehensive overview delves into the intricacies of car loans, including their mechanics, benefits, eligibility, application process, interest rates, tenure, challenges, and impact on the automotive industry.

Subas Tiwari

The Significance of Car Loans

Car ownership has evolved from being a luxury to becoming a necessity for many Indian households. However, the high upfront cost of purchasing a car often poses a financial challenge. Car loans bridge this affordability gap, enabling individuals to own a vehicle by distributing the cost over a defined period. These loans empower consumers to choose the car of their dreams without depleting their savings or disrupting their financial stability.

Eligibility Criteria

Banks institute specific eligibility criteria to ensure that borrowers are capable of repaying the loan. These criteria typically encompass age, income, employment stability, credit history, and existing financial obligations. Banks assess these factors to ascertain the borrower’s creditworthiness and repayment capacity. A strong credit profile increases the likelihood of loan approval and favourable terms.

Application Process

The process of applying for a car loan involves several stages. Borrowers are required to provide documentation supporting their identity, address, income, and employment details. These documents facilitate the bank’s assessment of the borrower’s financial stability. Additionally, details related to the selected vehicle, including its cost, specifications, and registration particulars, are essential for loan processing.

Who can take a Car Loan?

Before applying for a car loan, there are some conditions, which you need to take care of. This includes information about age, minimum salary, type of job and residence.

Documents Required for Car Loan

Proof of Identity (PAN Card, Passport, Driving License etc.)
Proof of Address like Voter I Card, Passport
Age Proof
Photograph
Car Documents
Proof of income like three months’ salary slips, six months bank statement, income tax return
Some companies do not finalize the loan without a copy of the car insurance and driving license.

Hypothecation

When you buy a car by taking a loan, it is mortgaged with the lending company. This gives them the right to confiscate your property in case they are unable to repay your loan. If you are not able to pay the monthly instalment on time, they can pick up the car and take it away. Hypothecation letter is also a part of the car registration process. Once you repay the loan, you can remove the hypothecation of the lending company from the registration papers. To remove the hypothecation, you will have to go to the respective RTO office with no objection certificate, car insurance papers and address proof. It is important to note here that it is necessary to take NOC from the company giving the loan. After this, give it to the insurance company and issue the insurance paper in the name of the new owner.

Interest Rates

Interest rates are a critical component of car loans, significantly impacting the overall cost of borrowing. Banks offer two types of interest rates: fixed and floating. Fixed rates remain constant throughout the loan tenure, providing borrowers with predictable monthly payments. Conversely, floating rates fluctuate based on market conditions, influencing the monthly instalment amount.

Car Loan Interest Rate Comparison of Top Banks

Banks Name	Interest Rates
Axis Bank	7.45% – 14.50%
Bank of Baroda	7% onwards
Bank of India	6.85% onwards
Bank of Maharashtra	6.40% onwards
Canara Bank	7.30% Onwards
Central Bank of India	7.25% – 7.70%
Federal Bank	7.65% Onwards
HDFC Bank	7.95% – 8.30%
ICICI Bank	7.90% Onwards
IDBI Bank	7.50% Onwards
Jammu & Kashmir Bank	7.85% Onwards
Karnataka Bank	7.50% Onwards
Karur Vysya Bank	7.80% Onwards
Lakshmi Vilas Bank	7.05% Onwards
Nainital Bank	9.20% Onwards
Punjab & Sind Bank	7.10% – 7.45%
Punjab National Bank	6.50% Onwards
RBL Bank	12.00% – 14.00%
SBI	7.20% – 7.90%
UCO Bank	7.25% Onwards
Yes Bank	9.25% Onwards
Union Bank	8.65% – 11%
Indian Bank	8.05% Onwards

Interest Rate Sourced from: https://www.wishfin.com on 09.08.2023.

Loan Tenure and Equated Monthly Instalments (EMIs)

The tenure of a car loan determines the duration within which the borrower will repay the loan. Longer tenures result in lower monthly EMIs but higher overall interest payments. Conversely, shorter tenures lead to higher EMIs but lower total interest expenses. The Equated Monthly Instalment (EMI) comprises both the principal loan amount and the interest, spread over the loan tenure.

Down Payment

A down payment is an initial amount paid by the borrower toward the car’s purchase price. The percentage of the down payment varies based on the bank’s policies and the borrower’s financial capacity. A higher down payment reduces the loan amount, influencing the EMI and total interest payments. Some banks offer flexible down payment options to accommodate diverse financial circumstances.

Car Loan Amount

The loan amount depends on your age and income. How much loan you get for the car depends on the lending company. Typically, you get a car loan up to four to six times your annual income. Up to 80-90 per cent of the cost of the car gets financed. Some banks, however, finance up to 100%. It can be ex showroom price or on road price. Ex-showroom price is the amount paid to a dealer for buying a car. When you bring the car for driving on the road after paying registration charges, insurance, road tax etc. then it is the on-road price. When you go to take a loan for a second-hand car, then the expenses incurred in re-registration are not covered.

What are the expenses in a car loan?

Banks levy many charges for giving loan or repaying the loan ahead of time.

The processing fee is charged when you apply.
This can be 0.4-1 percent of the loan amount.
Banks charge fees for premature repayment of the loan.
Some banks charge five to six percent on this.

However, some banks do not charge for this. Some banks offer part payment facility to repay the car loan. This means you can repay a part of the loan whenever you have the money. Some banks also charge a fee on payment. You cannot prepay the loan within six months of taking the loan.

Impact on Borrowers

Car loans have a significant impact on borrowers’ financial lives. On one hand, they empower individuals to acquire a car and enhance their mobility. On the other hand, borrowers must manage the monthly EMI payments within their budget. Failure to repay the loan on time can adversely affect the borrower’s credit score, potentially limiting their access to future credit facilities.

The Automotive Industry and Car Loans

The availability of car loans has transformed the Indian automotive industry. These loans have widened the consumer base, spurring increased car sales and driving economic growth. The industry’s response to changing consumer preferences has led to innovations in design, features, and technology. Car loans, in conjunction with attractive financing offers, have contributed to the evolution of the automotive landscape.

Challenges and Benefits

While car loans offer numerous advantages, they also present certain challenges. Borrowers must be vigilant about additional charges, processing fees, and prepayment penalties that may impact the overall cost of the loan. Fluctuations in interest rates can influence monthly payments, requiring borrowers to account for potential changes. However, the benefits of car loans, including affordable access to vehicles and improved mobility, often outweigh these challenges.

Future Outlook

The future of car loans in India holds promise as the financial landscape evolves. Banks are likely to introduce innovative solutions tailored to diverse customer needs. Technological advancements may streamline the application process, making it more convenient for borrowers. Additionally, the growth of electric vehicles (EVs) could lead to specialized loan offerings aimed at promoting sustainable mobility and reducing carbon emissions.

Getting the best deal on a car loan from banks in India involves careful research, comparison, negotiation, and understanding of the loan terms. Here’s a step-by-step guide to help you secure the most favourable car loan deal:

Research and Compare:Start by researching various banks and financial institutions that offer car loans. Look for reputable banks with competitive interest rates and favorable terms. Online comparison tools and financial websites can be helpful in comparing different loan offers side by side.
Check Eligibility:Before applying for a car loan, review the eligibility criteria of different banks. Ensure you meet the age, income, employment, and credit score requirements. This will increase your chances of getting approved for a loan.
Determine Loan Amount:Calculate the loan amount you need based on the car’s cost and the down payment you can afford. Consider including additional costs like insurance, registration, and taxes.
Check Interest Rates:Interest rates significantly impact the total cost of your car loan. Look for banks offering competitive interest rates. Fixed interest rates provide stability, while floating rates might offer flexibility based on market conditions.
Loan Tenure:Decide on a suitable loan tenure that aligns with your financial situation. While longer tenures result in lower monthly EMIs, they also lead to higher overall interest payments. Shorter tenures reduce interest costs but might result in higher EMIs.
Down Payment:A higher down payment reduces the loan amount and monthly EMIs. Aim for a substantial down payment to decrease the overall financial burden. Some banks might offer flexible down payment options.
Negotiation:Approach multiple banks with your requirements and negotiate the terms. If you have a good credit score and financial stability, you might be able to negotiate for better interest rates or loan terms.
Read the Fine Print: Carefully read and understand the loan agreement, including terms, conditions, fees, and charges. Be aware of any prepayment penalties, processing fees, and hidden costs.
Additional Benefits: Some banks offer additional benefits such as pre-approved loans, discounts on processing fees, or tie-ups with dealerships for better rates. Consider these perks when comparing loan offers.
Credit Score Improvement: A higher credit score often results in better loan terms. If your credit score is not optimal, consider improving it by paying off existing debts, clearing any errors from your credit report, and maintaining a good credit history.
Apply Online: Many banks offer the option to apply for a car loan online. Online applications are often more convenient and might come with exclusive offers.
Loan EMI Calculator: Use an online EMI calculator provided by banks to calculate your monthly EMIs based on the loan amount, interest rate, and tenure. This will help you plan your budget effectively.
Prepayment and Foreclosure: Check the terms for prepayment and foreclosure. Some banks might charge a penalty for repaying the loan before the tenure ends. Look for banks that offer flexibility in this regard.
Seek Professional Advice: If you’re unsure about any aspect of the car loan process, consider seeking advice from financial advisors or professionals who can guide you in making an informed decision.

Remember that the best deal on a car loan is not solely about the lowest interest rate. It’s about finding a loan that aligns with your financial situation and goals. Take your time, compare multiple offers, and ensure you fully understand the terms before committing to a car loan from any bank.

Points you should remember before buying a Car

Fix your budget-The first and foremost step while planning for a car purchase is determining how much you can spend. While you might have your eyes on a particular car, you cannot take it home unless your pocket allows it. According to a thumb rule, the total expenditure on all the cars including expenses on fuel, insurance premiums, maintenance costs, and more, within a household should be 25% of the total monthly income. Therefore, you will have to fix a budget that does not hamper your bills payment, savings, and other regular expenses.
Choose between new and pre-owned car-Once you have fixed your budget, it is important that you decide whether you want to buy a new car or a pre-owned one. You can weigh all the pros and cons of buying either of the types of cars and priorities based on your requirement. Then, you can assess if the chosen type of car fits your budget by calculating the ownership cost of the car.
Decide the kind of car you want-You should choose a car that best serves your requirement, circumstances, lifestyle, and taste. Make a list of the features and specifications of the car that you want such as seating, comfort, convenience, performance, and safety features. You will also have to decide whether you want to opt for a car with diesel or petrol engine. Based on your budget as well as your preference for an old or new car, you will have to narrow it down to a few car makes and models. Next, you can make a list of additional features that you would like to have in your car such as a sunroof, surround sound systems, heated seats, etc.
Check the resale value of the car-In terms of resale value, some cars might have the upper hand over others due to a powerful engine, better fuel efficiency, and popularity of the manufacturing brand. Furthermore, since car maintenance is one of biggest concerns for buyers, cars which have more service centers and better spare parts availability usually have greater resale values. When you are looking to buy a car, you should check its resale value in case you have to sell it during a financial crisis or just want an upgrade in subsequent time.
Secure your finances beforehand-One of the biggest mistakes that one can make is not looking into financing options before visiting a car dealership. While most of the dealerships provide financing options for their customers to help purchase the car they want or like, the interest rates offered during such circumstances are usually higher than the rates available in the market otherwise. You can check the current interest rates being offered by banks and other non-banking financing companies (NBFCs) in addition to any ongoing offers online.
Look for options-Checking the prices from several different dealers is a smart move. When you are planning to buy a car, walking out of at least one dealership will help you learn about the lowest cost of a particular car that they can offer. This information comes handy when you go to another dealership and try to negotiate the price. Additionally, it is also wise to check the prices at a few dealerships out of town since dealership prices vary depending on the location as well.
Learn about the car through a test drive-Even though you might have researched about the car and its features on the internet, you should take your time with the test drive. Ensure that you like the feel of the car while driving and otherwise. Even when the car is parked, you can experiment with the controls to check whether you and the passengers will be comfortable in it or not. Do not hesitate to ask for additional time to understand if you really like the car. In addition to comfort and features, you should also check the driving convenience, handling, brakes, etc. The car should also offer a quiet and smooth ride.
Negotiate the prices and terms-Cars are the second greatest assets of an individual, after his or her property holdings. Therefore, you should negotiate the terms and prices as much as possible to get the best deal before you make the investment. Negotiating the price of the car will help you bring the car loan down and can save you money in the long run. You can practice your negotiating skills beforehand and do not feel bad to walk away from any offer. Remember that confidence is the key during such a negotiation.
Focus on the total price instead of monthly payments-Trying to trick potential buyers into an expensive deal is second nature to salesmen. Do not be tempted to say yes to a low-cost deal with a long tenure since they might end up costing you more eventually. Also, make sure you learn about the total price of the car including all the hidden costs such as dealership costs, delivery charges, taxes, car preparation, and more. Dealerships often don’t often tell the customers about these additional charges unless the buyer enquires about them.
Factor the car insurance premiums in the total cost-Insurance costs have a huge impact on the total price of the car; therefore, it is important that you consider it along with the car’s price during a purchase. While sports cars usually have more expensive insurance premiums than other cars, there are several cars which have a high premium amount due to separate reasons. For example, Honda Civic, Toyota Camry, and Honda Accord have a high resale value and, hence, are more prone to theft. Therefore, they might have a higher insurance cost compared to the other cars in the same segment.
Avoid purchasing any add-on- Since salesmen earn commissions based on a percentage of the sales price, they might try to rope you into purchasing add-ons to increase the cost of the car. Try to keep the additional costs to a minimum by avoiding add-ons such as heated seats, rust proofing, rear camera, VIN etching, and dealership maintenance plan. You can also buy a GPS unit at a much cheaper price online, instead of buying the expensive built-in system.
Do not buy an extended warranty along with your car-The extended warranties offered by dealers are often expensive and provide minimum coverage. Be it a new or used car, such warranties also do not usually cover mechanical failures. If you are purchasing a new car, make sure that it has a manufacturer’s warranty to cover most of the damage costs. In case of a pre-owned car, you can check whether it still has an active manufacturer’s warranty. If not, you can save that money instead for potential repair and maintenance expenses.
Get the pre-owned car checked by a mechanic before purchase-In case you are planning to buy a used car, it is wise to get it thoroughly checked by an expert technician before the purchase is finalized. By doing this, you can not only become aware of the condition of the car but can also learn about any existing or potential concern as well. According to this report, you can decide whether you want to buy the car or the mechanical issues are too severe. This can also act as leverage while negotiating the price of the car.
Do not make an impulse buy-Being a huge investment, it is advisable that you do not buy a car just out of impulse. Purchase a car only after performing extensive research on the market so that you don’t regret your decision later. If you check all the financing options available as well as the car makes and models in the market, you will be able to buy a car that you can enjoy for many years, without becoming a burden on you.
Purchase a car while maintaining finances-Buying a car when you are repaying other debts can be a herculean task. If you are already paying off a car loan, the additional loan might impact your monthly income and savings. Therefore, purchasing a car only after the previous car loan is paid off is a better option than buying one while repaying an existing loan. By doing this, you will be able to avoid an upside-down car loan.

Since purchasing a car is a huge investment, you should perform thorough research to find the best interest rates as well as car make and model in the market to suit your needs and repayment capability. That way you can be well-prepared to negotiate and get the best deal possible on the new or used car of your choice. There are several aspects of a car that you should bear in mind to be able to choose the right one as per needs, such as fuel efficiency, type of fuel, availability of maintenance services and spare parts, etc.