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These days’ cars have become a necessity for families rather than a luxury. But cars are expensive, not all of them can purchase them with cash. In addition to this, when buying a car, people contemplate about the model and not finance. The most important thing to consider when purchasing a car is how to finance it. The easiest and convenient way of financing a car is taking out a loan.
Loans are offered for cars by a number of banks and other financial institutions. They offer them an attractive interest rate and other discounts. But before signing a loan document to finance your car read the fine print of the document. Also, consider the below-mentioned factors before taking an auto loan.
7 factors to consider when buying a car through a loan
Financing a car has become common these days. This is mainly because not all car owners can afford the expenses of buying one. But before purchasing a car or taking a loan, consider the below-mentioned factors:
- Interest rate:
The first step to car finance is checking the interest rate of the loan. Before filling up any car application, compare the interest rate of various banks. The interest rate of car finance can also be compared with other financial institutions and loan lending places before purchasing.
Remember that the interest rate of car loan varies. It varies from bank to bank and from one financial institution to another. In a hurry to buy a car, don’t fall for a trap and accept a loan at a higher interest rate. A slight difference in the interest rate of a loan makes a huge difference in the amount you need to repay.
- Get your credit score before taking a loan:
The credit score of a person is the most important aspect of approving a car loan. The creditors are offering you a loan to check the credit score of the applicant. This is because the credit score helps them in determining the creditworthiness of the person to grant a loan.
So, before applying for a car loan one has to check the credit score. This should be checked before six months of purchasing a car as six months is sufficient time to improve the credit score by taking the appropriate measure.
- The duration of the car loan:
The third important factor that you need to consider when applying for the loan is its duration. Duration of the loan is termed as the length of time to pay back the amount. The most common loan duration of car loans is 60 months, 72 months and 96 months.
In case your loan length is high, your monthly payment is less, but the overall interest that a person pays is more. Therefore, the duration of the loan must be decided by considering the financial status of the applicant.
- Affordability of EMI:
The monthly instalment that you need to pay towards the loan must be affordable. Apart interest rate of the loan amount considers the EMI. Suppose the EMI that you need to pay is more than what you can afford becomes a burden.
The thumb rule to follow is that the total EMI to pay equals to 40 per cent of a personal income. Following this rule will ensure that a person doesn’t fall into financial difficulty.
- Check and enquiry about other charges:
Usually, the loan amount with the carry processing fee and other charges. Ask the lender about them and read the loan document thoroughly to learn about these charges. Make sure these charges are less and within your budget.
- Repayment limitations:
The next factor to consider for a car loan is repayment limitation of the lender. Generally, banks and other lending platforms have a policy on repayment of loans. The interest rate that the market follows for repayment is 6 percent. The lenders also have a limitation of a number of repayments and the size of repayments allowed in an annual year.
Hence, consider all these rules of the lending institution before finalizing on an auto loan.
- Prepare your documents:
The last factor to consider financing a car is documents. All lenders and back before granting of loans will ask the applicants for certain documents. These documents help them complete the KYC of the applicant. The documents will also be important for verifying the past credit score of a person.
Every person who is applying for a loan must keep their KYC document ready. This saves a ton of time and speeds the process of approving the car loan.
Car finance is a common activity undertaken these days. A major share of people buying a car applies for a loan to meet the expenses. But applying for a car loan is a serious task and needs to be done with caution. Read the points shared in the article for getting a great deal in terms of car finance