Personal Finance - Two Wheeler Loans, Bike Loans

Many banks and financial institutions are making available finance for purchase of Two Wheelers viz. Motor Cycles, Scooters, Bikes. You should look into and compare the offers of banks / financial institutions carefully. Some important aspects need to be compared are:

  • Interest Rate: The interest rate to be charged by the Bank / financial institution
  • Whether the interest will be applied on daily reducing balance basis or on maximum outstanding during the month. The interest application on daily reducing balance basis results in reduction in interest load as the interest gets reduced from the date of credit of instalment in the account.
  • Prepayment / Advance Payment Penalty : All banks usually charge penalty for prepayment of loan. However, the amount of penalty charged by different banks / financial institutions is different. You should look into this area carefully as you may, in future, desire to prepay or switch the loan to some other bank / financial institution for the reason of lower interest rates or any other reason.
  • Processing / Application Handling Charges : These charges are also different for different banks / financial institutions.

The features, in general, of Car Loans available from banks are as under:

Purpose

For purchase of a New Bike / Motor Cycle or a Scooter.

Eligibility

Age 21 to 60 years for salaried class borrowers with a minimum six months in employment. 21 - 65 years for self-employed borrowers.
IncomeAn annual income of Rs. 60,000/ or more. (Differs from Bank to Bank.)

Amount of Loan

The amount of loan is determined by:
  • There is no upper limit for sanction of a Two Wheeler loan.
  • The eligibility for the loan amount is determined by the income of the borrower and the cost of the vehicle proposed to be purchased.
  • Banks finance upto 2.5 times the net annual income of the borrower or 80-95% of the cost of the vehicle.
  • Cost of Insurance and registration is also permitted to be included in the cost of vehicle by some banks for arriving at the amount of loan.

Interest Rate

The interest rate applicable on car loans is usually linked to the Advance/ Lending Rate of the financing bank and varies with the change in Prime Lending Rate (PLR)/Advance Rate of the bank.

Some banks charge interest on daily reducing balance basis and some banks charge interest on monthly reducing balance basis. The charging of interest on daily reducing balance basis results in less interest load on the borrower.

Processing fee and / or Application Handling Charges

The amount of processing fee / Application handling charges differ from bank to bank. Some banks charge a flat amount and some charge a percentage of the loan amount.
Some banks also retain a portion of the processing charges/fee in case of rejection of the loan application by the bank.

Type of Loan and Repayment

The loan is sanction as Term Loan. The repayment is allowed by way of monthly installments for a maximum period of 36 to 48 months.

Application

Application for the loan is required to be made on standard application form of the financing bank / financial institution.

Pre-sanction Documents

The application has to accompany the following documents:
  • Two Passport size photographs.
  • Quotation from the dealer for the Motor Cycle/ Scooter to be purchased.
  • Proof of identification (Not required in case of existing account holders) - Copy of Passport, Identity Card issued by the employer, Voter Id Card, PAN Card etc.,
  • Proof of address - Copy of a utility bill (electricity, water, telephone, gas etc.) in borrower's name at the given address, Voter Id Card, letter from employer, Credit Card statement etc.
  • Proof of income : Latest salary Slip showing all deductions and
    Copy of Form 16 issued by the employer for past one/ two years or copies of income tax returns filed.
  • Statement of Bank Account for last 6/12 months.
  • Post dated cheques for the monthly installments of the loan

Post Sanction Disbursal Documents

After sanction of the loan by the banks undernoted documents are required to be executed/ furnished by borrowers to banks:
  • Hypothecation Agreement on non-judicial stamp paper for hypothecating the Two-Wheeler to the Bank / financial institution.
  • Loan agreement on non-judicial stamp paper.
  • Third Party Guarantee on non-judicial stamp paper - Banks may ask for guarantee of one/two person(s) whose networth is good for the amount involved.
  • Copy of Registration Certificate (RC book) with noting of bank's interest in the vehicle as financer (Bank Clause).
  • Copy of Insurance Policy with noting of the Bank's interest as financer in the insurance policy.

Pre-payment / Advance Payment of Loan

All banks usually charge penalty for pre-payment of loan. However, the amount of penalty differs from bank to bank.