Car Loan



A car loan is a personal loan that allows the potential buyer to pay the vehicle off in monthly payments instead of having to pay the full price all at once... To qualify for an unsecured loan the borrower must have a very high credit score and also issue a higher interest rate on the loan as well

Auto loans can either be secured or unsecured. For secured car loans, the lender will put a lien on an asset owned by the borrower. Most secured loans will put a lien on the car being purchased. However, other types of secured auto loans may put a lien on another car or a house owned by the borrower.

Types of a car loan

There are three types of car finance available today, viz.

1. For purchase of a new car
2. For purchase of a used car
3. Loan against an existing car
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Who is eligible for a car loan?


Any individual aged 21 to 65 years with a good credit score and a steady income can apply for a car loan. Whether you are a salaried individual or a self-employed person, the minimum annual income requirement of an applicant is Rs.2 lakh. The applicant should have at the least 2 years of work experience in the same profession. In other words, the individual must hold down a job in the same field for a minimum of 2 years. Banks look at the applicant’s credit history at the time of processing a car loan application as it shows the person’s credit management skills. Having a credit score of 750 or above will make you eligible for a car loan. A good credit score indicates your creditworthiness. Depending on whether you meet the car loan eligibility criteria set by the bank, your car loan will be approved or denied. Before applying for a car loan, check your car loan eligibility online so as to avoid rejection. Too many rejections will have a negative impact on your credit score.

Secured Auto Loans vs. Unsecured Auto Loans


Auto loans can either be secured or unsecured. For secured car loans, the lender will put a lien on an asset owned by the borrower. Most secured loans will put a lien on the car being purchased. However, other types of secured auto loans may put a lien on another car or a house owned by the borrower. Consumers should make sure they know what assets secure their loans.

The act of putting a lien on an asset allows the lender to repossess that asset if payments are not made as agreed. The lien lowers the risk of default for the lender and allows consumers to obtain a lower rate than they likely could obtain with an unsecured loan.

Unsecured loans, on the other hand, do not allow lenders to repossess any assets if payments are missed. Instead, lenders have to go after the delinquent borrower through other legal means. This raises the cost and interest rate of most unsecured loans.


New Car Loan Vs Used Car Loan

The new car loan and used car loan differs not only in the purpose of the loan but also in interest rates and loan tenure. Obviously, the cost of a new car is higher than the cost of a second-hand car. However, does the same apply to the cost of new and used car loans? Listed below are the differences between new and used car loans:

Loan amount: As the price of a new car is higher than the price of a used car, the loan amount of a new car loan is higher than a used car loan. Banks offer new loans up to 85-100% of the ex-showroom or on-road price of a new car. Banks offer used car loans only up to 70-80% of the price of a used car.

Interest rate: As the loan amount for a used car is lesser than a new car, the interest rate for a used car loan is higher than a new car loan by 5-7%. Furthermore, lenders believe that providing a new car loan is less risky as a new car has better resale value than a used car.

Loan tenure: The loan tenure for new car loans ranges from 1 to 7 years whereas, for used car loans, it is 3 to 5 years. Thus, the loan tenure for a new car loan is longer than a used car loan. Car loan tenure is determined based on the age of the car and the loan amount.

Loan EMI payments: EMI payments are smaller for new car loans as they have longer repayment periods when compared to used car loans. The EMI for a used car loan is higher than a new car loan as the loan tenure for a used car loan is comparatively smaller.

Down payment: The down payment for a used car is higher than a new car as lenders are willing to lend a maximum loan amount of only half the price of a used car.

Car loan Documents required:

- Identity proof (anyone): Voter’s ID, PAN card, driving license, passport.
- Income proof: Latest salary slip, previous year’s Form 16, bank statement for the last 6 months.
- Residence proof (anyone): Voter’s ID, PAN card, driving license, passport, electricity bill. - Valid car documents.

What are the features of a car loan?

Understanding how a car loan works can help you choose a suitable car loan offer. Here are the important features of a car loan:

Car loan amount: Banks offer a maximum car loan of up to 85-100% of the on-road price/ex-showroom price of the car. If you pay a high down-payment on your chosen car, then the cost of your car loan will be less.

Car loan tenure: You can opt for a short or long car loan tenure ranging from 1 to 7 years. A short loan tenure will ensure you repay your loan in a short period of time but will have high EMIs whereas a long tenure will have low EMIs but you will end up paying more in interest payments. It is advisable to use an online car loan EMI calculator tool to choose a suitable car loan tenure so that you can save up on interest payments.

Car loan interest rate: In order to repay your car loan, you have to pay interest on the principal loan amount every month over the chosen loan tenure. The interest rate of a car loan will vary depending on the bank you choose. Visit a third-party website to compare various car loan offers across the top banks and choose one that offers the lowest interest rate.

Car loan EMI: A car loan is repaid to the bank in Equated Monthly Installments (EMIs). In order to get instant and accurate results of EMI calculation, use the online car loan EMI calculator that is available for free on the bank website or a reliable third-party website. The tool is easy to use - all you have to do is enter the loan amount, interest rate, loan tenure, and processing fee into the calculator and click on the ‘Calculate’ button. You will get a periodical loan repayment schedule in the form of an amortisation table. The table will consist of your EMIs, outstanding dues after each EMI payment, interest payments, etc. EMI calculation can help you find out how much your car loan will cost you monthly.

Processing fee: Banks charge a small percentage of the principal loan amount called the processing fee to process your car loan. The processing fee will be deducted at the time of disbursing the loan amount to your bank account. Some banks waiver the processing fee as a special offer. Prepayment/Preclosure: Banks allow borrowers to prepay a part of the car loan after 12 EMI payments have been made. For making this prepayment, you will have to pay a penalty fee which is a percentage of the prepayment amount called the prepayment fee. You can also choose to pay the loan amount in full before the end of its loan tenure called preclosure. Banks charge a preclosure fee which is a percentage of the remaining principal amount that you pay to close the loan. Pre-closing a car loan is not advisable as making timely EMI payments can help to improve your credit score.

Foreclosure: As the car acts as collateral in a car loan, if you were to default on your car loan, your car will be repossessed by the bank and put up for auction to compensate for the outstanding dues. This procedure is called car loan foreclosure.

Types of car loans: Banks offer 3 types of car loans - new car loan, used car loan, and loan against the car. As the names suggest, new car loans can be used to purchase a new car whereas a used car loan can be used to purchase a used or pre-owned car. A loan against a car is wherein you can pledge your old car in order to obtain a loan from the bank to purchase a new or second-hand car.