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Car Loan

A car loan is the money one borrows with the objective of buying a car. Hence, car loan is the amount of money lent to an individual, enterprise, or any entity for the purpose of buying a car. The authority that lends this money is the lender, while the entity borrowing this money is the borrower. When taking a loan, the borrower agrees to completely pay back the full loan amount, besides the interest, by a certain date, by the way of EMIs.

What is Car Loan?

The car loan came into existence in the year 1919, with the General Motors Corporation bringing up the General Motors Acceptance Corporation that arose as response to the rising demand for automobiles with American consumers post World War I.

In the year 1919, GMAC authorised desks in various North American cities. While car loans were there, majority of American consumers paid cash for their automobiles in the first half of the century.

Car loans work along the same rules and processes that are applicable to various other loans. For most of the situations, during purchase of car, the borrower will apply for a specific car loan. The consumer may also utilise a personal loan for purchasing car.

Why Choose a Car Loan?

Flexible Option: One has the option of deciding the length of loan repayment term, this could range from 1 to 7 years. Flexible payment option allows for incorporating extra costs such as on-road charges, insurance and roadside assistance into the amount financed. Secure: You may enjoy the security coming from fixed interest rate towards the term of the car loan. Utilise a handy Car Loan Calculator to decide your repayments.

Types of Car Loan

  • Standard: Here the financier gives you the money to buy a car. This is a simple loan that requires one to be financially well off and is willing for a little extra expense. This kind of loan can be non-secure with a higher interest rate.

  • Commercial Hire Purchase: Financier purchases the car and hires it to the customer for a set time period. This period may be for individuals or enterprises. Monthly payments mostly pay out the full loan in the established period, with the vehicle being transferred to the user when all payments are complete.

  • Finance Lease: Financier purchases the car and then leases it to the user. This allows for immediate utility of the car without capital investment. These leases are there for individuals as well as enterprises when the car is for business utility. Motorist disburses fixed, monthly rental payments and are financially responsible for maintenance and the trade-in risk from the car.

  • Novated Lease: This is a three-way method that reduces the employee's wage for equal value car benefit. Employee leases the car directly from the financier. Employer has to pay the financier via a deed made on the employee's salary. Most operating charges of the car such as registration, etc. get covered by the motorist. The motorist has the responsibility for the vehicle when termination of employment takes place.

  • Operating Lease: This is an agreement that supplements the financier’s intent for buying the vehicle and renting it for the motorist. Here, the financier keeps ownership of the car. The motorist has zero risks associated with vehicle’s ownership.

  • Chattel Mortgage: This is a fixed loan that allows the financier to advance money for purchasing a vehicle. Here, the financier has a mortgage over the car which is used as security for the loan. A residual payment may also be placed at the end of the term.

Features and Benefits of Car Loan

Step-up EMI: This system allows one to start repayment of the Car Loan in EMIs that are affordable and slowly increase over a period of time.

The benefit with Step-up EMI system is that as an individual’s income rises over a period of time, the car that may seem expensive now, becomes affordable by the next year. This method of EMI makes possible a larger loan amount that comes at smaller EMIs.

What is the balloon EMI scheme: Go for balloon EMI system that allows you to pay smaller EMIs through the repayment period and a massive amount at term’s end? This way you can even buy a bigger car at the EMI of a small car.

Car Loan Eligibility Criteria

Salaried Folk:

  • This is inclusive of employees of private limited enterprises, employees of public sector units that include local, central and state bodies.
  • Individuals who are a minimum of 21 years of age at the time of applying for the loan, and no older than 60 years at the end of the loan tenure.
  • Individuals who have had a job for at least 2 years, with a minimum of 1 year with the current employer.
  • Those who earn a minimum of INR 3,00,000 per year, including the income of the spouse/co-applicant.
  • Individuals who have a telephone/post-paid mobile.

Self-Employed under sole proprietorship:

  • This is inclusive of self-employed proprietors in self owned businesses of manufacture, trade and service.
  • Individuals who are a minimum of 21 years of age at the time of applying for the loan, and no older than 65 years at the end of the loan tenure.
  • Those who have been in business for a minimum of 2 years.
  • Should earn at least INR 3,00,000 per annum.

Self-Employed under partnership firms:

  • This includes partnerships under self-employed business of manufacture, trade and service.
  • Those who have a minimum turnover of INR3,00,000 per annum.

Self-Employed private limited entities:

  • This is inclusive of individuals with private enterprises in the manufacture, trade and service zones.
  • Should be making minimum INR 3,00,000 per year.

Self-Employed individuals under public limited companies:

  • This includes directors of public limited enterprises in manufacture, trade or service.
  • Should be making minimum INR3,00,000 per year.

Top Car Loan Providing Banks in India

BankInterest Rate
State Bank of India9.65%
Punjab National Bank9.40% - 9.75%
Axis Bank9.5% - 15%
HDFC Bank11.50% - 13.75%
ICICI Bank10.75% - 12.75%

How to Apply for Car Loan?

The application process is simple, one can do it online or by visiting the bank branch and filling up the required form and providing the necessary documents. However, do keep in mind the following points:

  • Credit Rating:

This is the number that financial institutions observe while deciding whether or not you’re an investment risk. You should get a copy of your credit report before applying for loan, this ensures that you won’t experience any surprises of the application getting rejected.

  • Keep Paperwork Ready:

Keep documentation ready to simplify the loan application process.

  • Find out more about pre-approval:

This allows you to know if you eligible for a car loan before the hunt is started. This lets you know how much you would spend with no worries about price negotiation or loan’s term.

Frequently Asked Questions

Can I get a loan to purchase a used car?

Yes. Many entities offer loans for used car. However, we advise against it, since used car loans cannot be easily be availed. There is also no use going for a personal loan for purchasing a car. One might end up with higher interest rates.

What documents do I need to submit when applying for a car loan?

You would require the following documents:

  • Age Proof

  • ID proof

  • Application

  • Passport photograph

  • Residence Proof

  • Proof of Income

  • Statement from Bank

  • Verification of Signature

What is the typical tenure of a car loan?

Mostly, minimum car loan tenure is 3 years, while maximum car loan tenure goes up to 9 years.

Do I need a loan guarantor or co-borrower?

The guarantor is linked to the loan alone. This means they won’t be responsible for repayments until when the borrower does not meet the stated financial obligations.

What is the difference between a fixed rate and a floating rate car loan?

The fixed rate of interest on a loan means that the EMIs remain consistent over the loan period. Whereas, floating interest rates mean that the EMI fluctuate along market dynamics.

Can I sell my car before repayment of the car loan is completed?

Yes, one may sell a car with a loan on it.

What if I don't pay EMIs on time?

When you don’t pay timely EMIs, the car loan default comes into play. After a prescribed number of payment failure mentioned on the loan agreement signed by you with the bank, the car is confiscated and recovery procedure begins.

What are some of the top car loan providers in India?

Some of the top car loan providers in India are-

  • State Bank of India

  • ICICI Bank

  • HDFC Bank

  • Bajaj Auto Finance Limited

  • Citibank

  • Kotak Mahindra Prime Limited

  • Bank of Baroda

  • Punjab National Bank

Can I get a loan for the entire cost of my car?

No., the amount of loan amount varies from lender to lender and cost of car based on the model