In case you have enough savings in your bank account to pay for the car in cash, it makes sense to take a loan for car even if the interest rate that you earn on savings will usually be lower than the car loan interest rates. After all buying a car is a depreciating asset and value of the car depreciates rapidly and many a times it drops faster than you repay the loan leaving you upside down.
If you do not have enough cash to make an upfront payment, you can go in for financing. But remember to take your financing decisions wisely. People usually do a lot of research to make sure that they get the best price for their new car. But they don’t bother about shopping for the best car loan. This is a big mistake, as even a 1% difference in interest can save you a lot of money.
If you do not do your research on the finance options available and solely rely on dealer’s financing then you may end up with a costly deal. Some dealers may offer you a good price on the vehicle but they may charge a higher rate of interest than what you are eligible for. This is where they intend to make profits on the deal. They usually mix up the car price with the interest costs. Bundling these transactions will only confuse you. It is in your interest to keep the purchase price and financing costs separate.
Also don’t get lured by the zero % financing offers where they claim that they will not charge you any interest. That’s because in such cases they won’t budge with the price of the car. That’s where they will make their profits.
If you still choose the dealer’s financing be careful about the terms that you agree to. Check if there are any hidden fees that were not disclosed during the negotiations.
Car loan from banks
If you have a pre-approved car loan in hand before you walk into the dealer’s showroom to make your purchase, you will have a greater bargaining power. You can consider the dealer’s offer, compare the interest rates and the terms that he is offering and then take the best choice.
If you have a good credit rating taking a car loan is the best way to finance it. Some things that need to be considered are
- Consider the APR of various banks to compare the total cost of borrowings and secure the best deal
- Determine how much you should contribute as an initial payment. The more you pay upfront the less will be your monthly payments.
- The duration of the loan affects the interest you pay on the loan. Keep the term short if you can afford to do so. Though your monthly payment would be higher you would be saving on the total cost of financing. It may be tempting to increase the term to reduce your monthly instalments but since car value depreciates rapidly, this may leave you in an upside down situation where you owe more than your car’s worth. Also you will end up paying a lot in the form of interest charges.
- Check your credit score before you file the car loan This will help in determining whether the interest rate offered to you are justified or do you qualify for better rates. It will help in avoiding any unpleasant surprises. If you have a strong credit rating you will have an upper hand in bargaining for better loan terms and interest rates. Even in case of a poor Cibil rating it is unlikely that your loan status shows rejected. Loan will not be denied as the bank can repossess your car in case you don’t pay. But you will have to shell out more money than someone with good credit. Different banks have different car loan options for people with bad credit, and it is necessary to shop around to strike the best deal.