Many get tempted to buy a car by seeing swanky cars on the road. Having a car is a dream for many. For some, they can buy it like a commodity but for the majority of them, a car is still a luxury, especially in middle-class families. Thanks to the plethora of financing options available, you can now easily buy your dream car through the finance route. But it is very easy to be tempted by these financial schemes. One wrong step can send you into a debt trap, which then, will be very hard for you to get out of. Therefore before taking the plunge, you must follow some financial thumb rules and vehicle finance check so that you can safely enjoy your experience with your car, without falling into a debt trap.
“Money Car” by free pictures of money is licensed under CC BY 2.0
1. The financial thumb rule-
Before financing a car, you must do some calculations to make a budget. The general rule is that you must make at least a 20% down payment of the total loan and your total expenses towards your car(including your EMI) should not cross 10% of your gross annual income. For example, if your annual income is 20 lakhs, then your total car expense, including car EMI should not cross 2 lakh per annum. Also, the maximum price or the on-road price of the car should be less than 50% of your gross annual income. Through this rule, you can ensure that your finances are in check and the affordability of your car would not be a problem.
2. Which financial institution to go for?
An important vehicle finance check. Several auto dealers have a tie-up with their financial institutions, both private and public service providers. You should not blindly deal with the dealer-provided services and do a bit of market research. Most of the private financial institutions have hidden terms and agreements, which can bite you back in the future. Always go for a floating rate of interest as in the long term, it is beneficial. SBI provides some good car loans services and is among the favorite choice of loan seekers. Some banks provide full-on road loans and some provide only up to 80% of the car value, so keep that in mind before taking the plunge. One of the most important things is that you should go with a bank which provides early closure with no extra fee. In case you can pay the loan amount early, then the bank should have the option to square it out in a lump sum amount.
3. Who can apply for a car loan?
The criteria for applying for a car loan varies from lender to lender but there are some common requirements. You should be a major/adult of 18 years or above. Then there are other criteria like whether you are salaried or self-employed, the place you live(rural or urban), whether you can produce form-16 regarding bank statements or not. There are several agents through which you can apply for your car loan, but it is advised that you should do it yourself. With several services online, you can do it yourself and save some money.
4. Loan or upfront payments?
This is a very important question, whether you should go with a loan or pay upfront. The answer is simple, if you can afford to pay upfront, then you should go with it, as with a car loan, you will be paying a lot extra in terms of interest. That extra amount if invested can generate a serious amount of money. If you are risk-averse and invest just by FD’s, the returns are generated at around 5-6% (post-tax) and your vehicle loan interest is about 7.5% (arbitrary numbers), in this case, it is worth making full payment as you would otherwise pay 7.5% when the returns you are getting are only 5-6%. On the other hand, if you have invested in a higher rate, but risky equities that generate a 10% return, then you can easily afford a car loan.
5. Other things to consider
Taking all things into consideration, you should only buy a vehicle if you have a real requirement for it. It is very easy to get tempted to buy a vehicle and it is so common among the 20s age group. That same money, you can invest into something meaningful that will generate you some good returns. Remember, a car is a depreciating asset and eats up your money quickly. Another option is that you can go for a second-hand car. In the case of a second-hand car, the first owner has taken the brunt of depreciation and you can bang a great deal. There are many 1-3-year old cars available in the market that can make for a great deal. Overall, the total expense of the vehicle that you own, should not cross 10% of the gross annual income, to make it an intelligent financial decision.
Conclusion
As they say, ‘danger ahead, tread carefully’ so is the case with vehicle financing and you must follow the vehicle finance check. The road of car finance is filled with such dangers and a common mistake can send you down the whirlwind of unnecessary debt. So be very careful while going in for a car loan and do your research carefully. Remember, the fancier the deal, the more aware you should be while scouting for a car loan. A smart and wise move can save you a lot of money in the long run.
