How to Take Car Loan

If you intend to buy a car there are lots of options available with launch of new car brands in the Indian market. Going for the right kind of car loan is very important in the case you decide to buy a car on finance. There are lots of factors that play their roles when you decide about a certain car loan. Normally it is better to peg your car loan around 10-15 % of your net income.


Deciding to buy a new car or an old one depends on various factors. A lot of people go for a used car when they go for their first purchase. On the other hand, majority of people will prefer a new car. For people who keep changing their car frequently it is preferable to buy an old one as they may change even a new car soon. On the other hand, anyone with a habit of sticking to one car for a long time should purchase a new one as it will give them more satisfaction.

When going for buying a car it is recommenced to have some factors clear in mind, like the budget for purchasing the car, monthly budget for the car and the period you intend to use the car. Where you are going to use the vehicle (town or village) is another factor that can influence your decision in buying a car

Note that before buying an old car it is advisable to take the advice of a mechanic about the various performance criteria like lyres, suspension and cooling of the car

Getting a car loan has become easier now a days. There is a healthy completion in the market among banks to offer finance options to clients and earn interest on them.

Taking car loan from some financial institution is the easiest and most used way of financing your car. In this case the car you buy is actually a possession of the lending institution. The formal term used is ‘hypothecation clause’, which means that though you own the car, the lending institution is using the car as a security against the loan taken by you. Once you have cleared all the dues, this clause is removed from the agreement. It is notable that a self-employed person can get tax relief on the interest paid for the car loan.

Another finance option for purchasing a car is hire purchase. In this system, the lender buys the car on your behalf and sells it to you on hire purchase. In fact, you hire the car from the lender and own it once you have settled the dues.

Lease is another option for financing a car. If you go for this option, the car is owned by the financier and leased out to you for a monthly installment, which includes both principal and interest payment. When the lease period ends, you become the owner of the car and the vehicle is formally transferred in your name



You need to do all the necessary paperwork when you are going to buy a car. The paperwork includes dealing with power of attorney that allows the dealer to go to the RTO and register the vehicle and transfer of title in the case you are trading in a car. While signing the legal documents take care and do not hesitate to check the facts in case you have any doubts.

You should know that when a bank offers you a car loan it charges a processing fee, which is a certain percentage of the total loan amount. The fee amount may vary from bank to bank and it is paid upfront. This fee is taken from the amount of money you get as loan.

You should take care in choosing a bank and should check its fee percentage as it can have a big impact on the final loan amount you get and the cost you have to bear.

While going for a car loan, monthly installment also known as Equated Monthly Installment (EMI) is something that counts a lot. You should be careful about this amount to be repaid to the bank. The rate of interest and the amount of EMI differ from bank to bank. So, take care to go for the bank that offers the best deal.

There are various methods to calculate the EMI to be repaid to the bank that provided you the car loan. Some banks calculate the EMI based on the day by day basis. In this method, the principal is reduced every day as if you were making repayment of the principal on a daily basis. On the other hand some banks use the monthly basis method in which the interest reduces every month when you pay your EMI. Some banks use the quarterly method, in which the principal reduces every three months. In the yearly method the principal is reduced at the end of each year.

The aforementioned methods of calculating the EMI amount is used by banks. You should check before going for any car loan and should be aware about the method employed by the bank.

Some banks charge a certain penalty in the case you decide to prepay the loan amount. Prepayment may happen in the case your finances improve and you decide to pay back all the outstanding loan amount. This results in the bank losing the interest amount that it could have earned. So, most of banks charge a certain prepayment penalty. They want to discourage you from prepaying. The amount of the penalty may differ from bank to bank. Check for the prepayment charge details in the case you are going for a car loan. It is advisable to go for a bank that charges no amount as penalty for prepayment. In the case all banks charge you should better go for the bank that charges the minimum penalty.

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neha Patel

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