Things to Consider When Applying for a Car Loan
By Space Coast Daily // January 14, 2021
Are you planning on buying your dream car soon? Have you been thinking about how to manage your finances to get those hot wheels parked in your garage? This guide is focused on helping you sort things out before you set out on purchasing your dream car.
There are an awful lot of things that need to be handled before you buy a new car. You might even need to apply for a loan if you weren’t born with a silver spoon in your mouth or don’t have enough money set aside.
Without proper calculations and analysis, it can be very difficult to make a well-informed decision. You wouldn’t want to spend more money than you have to just because you didn’t think things through, right?
Well, in that case, make sure you carefully consider the following points before applying for a loan.
Why Take out a Loan?
Turning the dream of buying a car into reality is made simple through car loans. You don’t have to save for years before you get to own and drive a car of your choice.
Banks offer a variety of loan options that can make or break your financial goals. Applying for a loan can be complicated and sometimes feel overwhelming. But don’t worry, we have compiled a list of things to consider before you apply for a car loan.
Things to Consider
You must calculate and map out your exact expenditure limit so that fulfilling one dream doesn’t mean sacrificing another. You need to have an accurately clear budget set in mind regarding how much you can afford to invest in your vehicle of choice. And this budget doesn’t just include the price of the car, it also includes the interest rate, taxes, and insurance amount. So consider all of these things when setting a budget for your car.
When you go to a bank to apply for a loan, they perform a background check which generally includes a detailed analysis of your credit score or rating. If you always pay your dues and bills on time, then your credit score will probably have a higher rating.
But if you’ve missed out on some of your payments or have defaulted in any account, then your credit score takes a hit too. Depending on your credit score, a bank decides how much money can be loaned out to you. So it is wise to check your credit score at least six months before applying for the loan.
Different lenders can charge different interest rates on the amount that you want to borrow. Compare all the available options from different lenders before you choose one. You have to consider the interest rate as a deal-breaker because you’re going to have to pay that much more on your loan amount.
Choose a bank or lender with low rate personal loans since it will be the most affordable option. Even minute differences in interest rates can make a huge impact on the monthly installments that you’ll have to repay.
You have to be very careful while selecting an EMI (equated monthly installment) option. Always consider your ongoing EMIs, be it a house loan, education loans, or other expenses, before committing to yet another EMI.
You need to be confident about paying your EMIs on time, since failing to do so can adversely affect your relationship with the bank, and applying for future loans can prove to be really difficult. In worse cases, your car might get reimbursed. In ideal cases, if all your EMIs fall within one-fourth of your total income, it is considered to be affordable.
Loan To Value Ratio
LTV ratio is a term often used by bankers and lenders to define the ratio of loan to the appraised value of your property/car. This ratio is the proportion of your car’s price that will be paid by the lender.
The remaining amount, also known as down-payment, has to be paid by you. Lenders don’t generally pay 100% of your car’s price, so it is crucial to compare the LTV ratios offered by various banks. Experts advise that higher down payment amounts can fetch lower interest rates and better loan terms.
While taking a loan you’ll have several options regarding the tenure or period of repayment for that loan. Banks or lenders tend to offer lower interest rates for longer tenures. Opting for longer loan repayment periods may seem ideal and you might find it comfortable at the start.
But you’ll end up paying much more in terms of interest amount than you’d ideally do in shorter loan tenures. If you opt for shorter loan tenures, you’ll get over the entire facade much more quickly and will definitely save a lot of interest money.
Terms and Conditions
We’ve all heard of the “terms and conditions” generally applied by banks in most of the transactions. It is pivotal to check all related documents carefully because otherwise, you won’t ever learn about any hidden charges or taxes that the bank might charge you for.
Certain banks even levy a pre-closure penalty in case you pay the entire amount before the completion of your tenure. You must keep an eye out for it. Most banks even charge high processing fees while lending money to a borrower. That’s another thing to chalk out before you sign the documents.