Personal Finance - Car Loans

With the growing competition for personal finance among banks and financial institutions, every bank/ financial institution is coming with attractions like prompt finance, easy installments, low interest rates etc. An individual looking for car finance should compare the offers carefully before finalizing the bank / financial institution for availing the finance. Some important aspect 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 cost 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 penalty clauses 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 Car, a Jeep or a Multi Utility Vehicle

For purchase of a Used Car a Jeep or a Multi Utility Vehicle. Usually banks finance used cars not older than 5 - 10 years. The age of the used car eligible for finance differs from bank to bank. For taking over of a Car Loan from another bank or financial institution.

Eligibility

21 to 60 years for salaried class borrowers with a minimum one year in employment and 21 - 65 years for self-employed borrowers.

An annual income of Rs. 1 lac 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 car 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 generally finance upto 2.5 times the net annual income of the borrower or 80-90% of the cost of the vehicle, whichever is lower.
  • 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 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 sanctioned as Term Loan. The repayment is allowed by way of monthly installments for a maximum period of 7 years.

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 car to be purchased / copy of Sale Agreement with the seller in case of a used car.
  • Valuation Certificate from approved valuer in case of a used car.
  • 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 12/24 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 vehicle to the Bank / financial institution.
  • Term Loan agreement on non-judicial stamp paper.
  • Third Party Guarantee on non-judicial stamp paper- Banks may ask for guarantee of a person whose networth is good for the amount involved.
  • Copy of Registration Certificate (RC book) with noting of the Bank's interest in the car / 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.