Five ways to lower your car loan burden
With banks raising interest rates on car loans, and even SBI raising its eligibility benchmark, here are five easy ways to lower your car loan burden.
Most banks have raised their benchmark rates, leading to a hike in car loan rates. These loans have a fixed rate throughout the term, which means that if you ask for a loan today, you’ll continue to pay at these rates for the next five years or whatever the term of your loan is. Even State Bank of India, which often has very lenient terms for loans, isn’t optimistic about the sector, it appears.
As the percentage of non-performing assets in its portfolio rose, the largest public sector lender raised its eligibility benchmark for car loans to Rs6 lakh per annum from Rs2.5 lakh. If there is no urgency to buying a car, waiting to see if things improve might be a good option, but do note that the auto industry is experiencing a slowdown. Therefore, most of them are offering discounts which could offset the higher interest rates to some extent. If you’re keen on buying your car now – though these tips will work well even if rates cool down – use these tips to lower your EMIs.
Stick to your bank: You can get accurate interest rates on car loans for all banks, except your own. This is because many banks, particularly private banks, are willing to make some concessions with their own customers. Axis Bank, for example, mentions that it has special rates for account holders, as do HDFC Bank and ICICI. Aside from lower interest rates, even the processing fees may be discounted. While outsiders will have to pay up to Rs5,500 as processing fee, in-house customers need only shell out Rs500. Public sector banks may be less accommodating (as they’re much cheaper to bank with), but even they may be willing to give you a better deal.
Get a concession: If you don’t repay your car loan, the bank will repossess your car. But if that was security enough, we’d all get similar rates from the same bank. But that’s not always the case. Just as private sector banks are willing to lower their rates for their own customers, many banks will lower their rates if you’re willing to sweeten the deal for them. Bank of Baroda will, for example, give you a concession of 0.5 % in the interest rate if you offer 50% liquid security as collateral. The investment will continue to earn a return, but the bank will be in possession of it until the loan is paid off.
Always bargain: There’s no retail price for loans and the fees involved. If there’s a disadvantage to having a low credit score, there is a small upside to having a good credit score. You do have some leverage with a bank when you’re asking for a loan if you have a stellar credit history. If you plan to stick with a private bank, where they could ease up is on the prepayment fee. Other fees you may haggle about with them are processing charges, administrative fees and even the interest rate.
Prepayment must be free: After the interest rate, this is the next thing you need to look at. Some banks will charge you heavily for this, as it’s a fixed rate loan, while with others, it’s free. This is important because as the years go by, your income may rise and it’s typically better to pay off your debt rather than invest your savings. Our research tells us that public sector banks don’t charge for prepayment, while private banks do.
Consider pre-owned: If you’re in the market for a second-hand car, remember that banks are very skeptical about financing them. The tenure of your loan will be short (no more than three years), which means your EMIs could be high, and the interest rates will be high. Banks are also unlikely to lend a major portion of the car’s value, as they will be unsure of the car’s state. If you’re finding this deal impractical, consider pre-owned cars, sold by Mahindra First Choice and Maruti True Value, among others. These are certified, under warranty, and, therefore, viewed with less skepticism by bankers (these organised dealers usually have tie-ups with banks and financiers anyway). The tenure of your loan doesn’t have to be as short as with a second-hand car and the interest rates could be a couple of points lower.