What is Auto Loan? & How does it work?

Gone are the days when owning a car or a two wheeler was a luxury. Today it has become necessary for everyone to have their own vehicle. Your first car; expensive upgrade of an older model; Be it a used car, a commercial vehicle or a two wheeler, an auto loan brings them all within your reach.

What is Auto Loan?

What is Auto Loan

An auto loan is taken by lenders to buy a new or used personal or commercial vehicle. Auto loans are secured loans where the vehicle is used as collateral. It is offered by lenders for new cars, used cars, two-wheelers (commonly called a two-wheeler loan) and commercial vehicles (commonly called a commercial vehicle loan).

What is meant by auto loan?

Auto loan allows one to take a loan to buy a car or truck. Auto loans are generally simple-interest loans that are usually repaid over a period of three or five years.

A car is often the second biggest purchase one sees after buying their home. Auto loans help in taking out vehicles that often cost more than Rs lakh, by breaking the high cost into monthly payments that work with the budgets of various lenders.

How do auto loans work?

Auto loans are simple-interest loans, where the lender expects the amount to be repaid by the borrower in monthly installments (the principal), plus interest (the cost of borrowing from the lender, shown as a percentage of the principal). ,

For example, let’s say you want to buy a car for Rs 7,00,000. After paying a down payment of Rs. 2,00,000, you decide that you want to take an auto loan to finance the remaining Rs. 5,00,000 (Principal). 

After making a purchase and submitting your financial information to lenders, many lenders offer you an auto loan with an interest rate for this amount – commonly referred to as an annual percentage rate (APR) – 7%.

By plugging this into a car loan calculator, you can find out what your payments might be on a variety of terms to see what’s most affordable on a monthly basis. For example, if you financed a 60-month (five year) auto loan at 7% for Rs 5,00,000, your payment would be Rs 9,901 per month and you would pay a total of Rs 94,036 in interest charges over the course of the loan. will do.

If you have opted for a 36-month (three year) auto loan on these terms, your payment will be costlier by Rs 15,439 per month, but you will pay only Rs 55,788 in interest charges.

How long is the auto loan repayment tenure?

Depending on your credit rating, annual income and the size of the loan, you can be offered auto loans with a wide range of time-related repayment terms. Generally, a borrower is expected to pay back the lender in monthly installments over the course of one to five years (whichever is agreed upon by the borrower and lender).

With many buyers buying more expensive vehicles these days, many lenders now offer auto loans with repayment terms of up to 80 months (7 years). A longer repayment term may make your monthly payment smaller than a shorter term auto loan, but you will have to pay higher interest charges over the term of the loan.

Financing a Car Through a Bank Vs. A Dealership

Many car buyers apply for an auto loan through a lender or bank, which will assess your credit score, annual income, job history and other factors that determine how much you are willing to repay.

Generally, the higher your income and credit score, the higher the loan amount and the lower the interest rate offered by the lender.

Alternatively, you can also apply through a car dealer after selecting the car to buy. Typically, dealer auto loans come with higher interest rates than pre-purchase lender loans.

However, buyers with exceptional credit (credit scores above 750) can sometimes obtain 0% financing from a dealer for a certain period of time.

Can a personal loan be used to buy a car?

Many lenders will only approve auto loans for cars that are of a certain age (usually 5 years or less). Since an auto loan is a ‘secured’ type of loan, the car that is being financed is used as collateral (i.e. if you fail to repay your auto loan, your car will be seized by the lender).

who can then sell the car to get some of its money back). And because cars depreciate and lose value over time, lenders don’t like to offer auto loans on used cars because they might not be able to repay as much in the event you can’t repay.

What to do? If the car you want to buy is older than the lender’s requirement for an auto loan, you can consider taking a personal loan to finance the purchase. 

Personal loans generally come with higher interest rates and may require a higher credit score, but because they are ‘unsecured’, your car will not be used as collateral by the lender and if you fail to repay the loan. If it fails, it cannot be taken directly.

What does the loan/repayment look like?

Banks usually offer auto loans up to 90% of the cost for new vehicles and up to 85% for older vehicles. The vehicle is kept with the lender as collateral. Repayment is based on your monthly income and your repayment capacity and the tenure is usually between 12-84 months.

What are the normal interest rates for Auto Loan?

Lenders fix interest rates based on the type of vehicle and loan amount. The interest rates for auto loans are generally fixed.

What do lenders look for before giving an auto loan?

The loan approval process for auto loans is relatively easy as compared to home loans. However, some of the basic criteria that lenders look into before approving your loan application are:

  1. CIBIL Score and Report: Like all other loans, lenders look at your current credit health as well as the pattern of your past payment history. Lenders look for a high CIBIL score and a good credit profile before determining the final status of your loan application. A high CIBIL score increases your chances of loan approval.
  2. Employment and Income Status: Lenders also check that you have a stable employment and a steady source of monthly income to ensure loan repayment throughout the tenure of the loan.
  3. Current Loan Repayment: Lenders also keep an eye on all your current EMIs before deciding to grant you a loan. They generally determine your EMI outflow and monthly income ratio. Make sure that your EMI obligations are not a very high percentage of your income.

What are the documents required to apply for an auto loan?

The actual documents required vary from one lender to another. However the basic list of documents required by the lenders are: identity proof, address proof, salary and bank details.

What other costs, fees and charges will I have to bear?

Apart from the actual vehicle cost, you need to check related costs like taxes, registration fee, sum insured, processing fee, documentation charges and stamp duty etc. It is always advisable to check all the fees and charges beforehand while applying for a loan.

What to keep in mind while taking an auto loan?

While it is not always necessary to go with the bank suggested by your vehicle dealer, you can always switch to another lender if they offer better loan terms. Therefore, always do a thorough research by comparing lenders and their rates before finalizing a lender.

Frequently Asked Questions on Auto Loans

What is an auto loan?

Auto loans are secured loans that use the car you are buying as collateral. You are typically asked to pay a fixed interest rate and monthly payments for 24 to 84 months, at which point your car will be paid off.

Is an auto loan a good idea?

Car financing can be a good idea when: You want to drive a new car so you may not be able to save enough cash in a reasonable amount of time. The interest rate is low, so the additional cost will not add much to the total cost of the vehicle. Regular payments will not strain your current or upcoming budget

Read also – How to take a loan from Money View

Can you repay the auto loan early?

Some lenders charge a penalty for early repayment of the auto loan. The lender makes money every month from the interest you pay on your loan. Paying off a loan early usually means you won’t pay any more interest, but there may be an early prepayment fee.