(ThyBlackMan.com) Buying a car is a major decision, and taking a car loan can make it easier to afford. However, car loans come with a few traps that many buyers fall into, leading to unnecessary costs or financial stress. Tools like a car loan EMI calculator can clarify monthly payments and total loan costs. Here are five common mistakes to avoid when taking a car loan to help you make a better financial decision.
5 Car Loan Mistakes to Avoid
Here are some common car loan mistakes one should avoid:
1. Not Monitoring Your Credit Score
Your CIBIL score is the single most significant factor determining car loan eligibility, tenure, and interest rates offered by loan providers. Yet, many applicants do not track or work to enhance their scores before applying.
This can lead to negative consequences:
- Not knowing your credit score can mean unexpectedly higher interest rates or even loan rejection.
- Every 50-60 point increase in score can save thousands in interest over a 5-year loan period.
- Scores below 750 usually make it harder to get competitive interest rates.
So, be sure to:
- Review your credit information reports from agencies like CIBIL.
- Monitor your score periodically in the 6-12 months before applying.
- Take constructive actions to boost your score above 750 before applying.
Being credit-healthy widens loan provider options, accelerates approval, and saves interest costs over the long run.
2. Not Evaluating all Applicable Fees & Charges
While interest rates rightly gain attention, borrowers often gloss over vital ancillary charges that can substantially impact overall costs:
- Processing fees
- Prepayment and foreclosure penalties in case of early closure
- NOC and transfer charges when selling the car
- GPS equipment installation and recurring maintenance costs
Factor such as fees when comparing offerings to identify the cheapest financing option. For instance, processing charges alone on a ?6 lakh loan can vary by ?10,000-15,000 across different loan providers.
3. Overextending Your Budget
Another common pitfall is succumbing to the temptation to buy a more premium or unaffordable car that overshoots your budget.
This leads to:
- Picking longer tenure to make EMI seem affordable. But longer-period loans heighten interest costs
- Compromising on essential monthly savings and investment goals
- Potential loan rejection due to high debt-to-income ratio
Stick to your budget when applying for a loan amount you can comfortably repay on time without constraints.
4. Opting for a Long Tenure to Reduce EMI
Longer car loan tenures of 7-8 years are appropriate because they significantly reduce the EMI burden.
But they also attract much higher interest charges over the entire tenure:
- A 6-year ?6 lakh loan at 10% requires an EMI of ?11,200 for 6 years, totalling ?7.5 lakh.
- The same loan over 8 years demands a lower EMI of ?9,500 but with a higher overall outflow of ?8.6 lakh in interest.
So, resist the temptation to elongate tenure only to shrink the EMI size. Instead, optimise tenure to what you can afford monthly.
5. Not Reading the Fine Print
In the thrill of financing a new car purchase, many borrowers gloss over vital aspects in the fine print like:
- Applicable interest rate – Fixed or floating rate loans
- Prepayment and foreclosure policies – Charges for early closure
- Detailed fee structure – Processing, late payment, cheque bounce penalties, etc
- Insurance – Whether optional or mandatory
Review all relevant terms, conditions, and charges thoroughly so that no unexpected fees or limitations are imposed later. This will enable you to make a well-informed car loan decision that aligns with your priorities and inclinations.
Conclusion
Avoiding those missteps facilitates securing the best-suited interest rates and flexible payment tenures. One can happily embark on safe driving for years without loan-related tensions.
Before settling on a loan, use a car loan EMI calculator to estimate your potential monthly payments. This helps verify that they align with your budget. Checking how different loan amounts and periods affect the EMI makes it simpler to plan financially ahead.
Staff Writer; Peter Brown
