26 Oct 2015 14:55 IST

Drive away with a vehicle loan

While the terms are somewhat standard, take advantage of the special schemes being offered

Thinking of buying a new car or bike this festive season? Thanks to vehicle loan options from public and private banks as well as NBFCs, getting a vehicle loan can be a breeze.

Brass tacks

You can get a new car loan for about 90 per cent of the value of the vehicle. This value does not include any additional costs such as taxes or insurance. Lenders however have the discretionary power to alter the loan-to-value depending on their assessment of the borrower’s financial profile.

Car and two-wheeler loans typically have tenures of one to five years. Banks such as HDFC, SBI and Bharatiya Mahila Bank offer longer tenure of up to seven years.

Public sector banks tend to offer lower interest rates of about 10 per cent. Bharatiya Mahila Bank for instance offers loans at 9.7 per cent rate currently. Financing provided by non-banking financial institutions, such as the auto manufacturer’s financing arms, may charge higher interest rates but may offer other advantages. For instance, you may be able to avail yourself of a loan for the entire value of the car.

Rates also vary based on the loan tenure, borrower’s credit worthiness and the type of vehicle. For example, the interest rates you pay for a luxury car would generally be lower than the rate for a compact car.

Special terms

While the terms are somewhat standard, there are deals you can take advantage of. Say you have a home loan with SBI. You can get a special interest rate of 9.6 per cent under the SBI loyalty car loan scheme, compared to the normal car loan rate of 9.85 per cent.

You can also get better terms when buying cars made by certain manufacturers. For instance SBI offers better terms for young people in the age group of 18-28 years to buy a Tata Nano car under its Nano youth car loan scheme.

Women can avail themselves of a rebate of 0.5 per cent on their two-wheeler interest rate with Mahindra Finance. Andhra Bank’s Vanitha Vahan scheme helps salaried women, including self-employed, purchase a new four or two wheeler on favourable terms. “Special vehicle loan offers come up for certain category of professionals such as teachers or doctors from time to time”, says N Mahalingam, Managing Director, RupeeZone.

During certain seasons — festivals, year-end, financial year-end — dealers and lenders offer promotional deals on vehicle price and loans. Lenders may also give favourable terms on processing fees — which can be 0.5-2 per cent of the loan amount. SBI, for instance, has waived processing fee for many new vehicle loan categories till the end of 2015.

Even in the absence of special schemes, you may be able to wring out a good deal if you have a good credit score. If speed and ease are your priority, NBFCs and private banks may score over public sector banks.

Evaluating loans

You must consider loan tenure, loan-to-value, interest rate, documentation requirement and speed of disbursal in evaluating lenders. Interest rates for new vehicle loans tread a narrow band, but it helps to check with multiple lenders and negotiate.

Lenders recommended by your dealer may be a choice to consider instead of shopping around. Maruti Suzuki Finance, for instance, has a tie up with 37 finance partners, including public and private sector banks, NBFCs such as Sundaram Finance to cater to a wide range of customer profiles. You must certainly check with the bank where you have an account — they could offer attractive terms and conditions as well as simpler documentation, given that they have your details.

Ranjit Punja, co-founder of CreditMantri advises that even if you can get a loan for the full vehicle value, it is better to cover at least 10-20 per cent of the vehicle value from your own sources. This, he says, can help you negotiate better terms with the lender. One reason is because vehicles are depreciating assets and banks tend to charge higher interest rates, particularly if the tenure is longer.

Pre-payment terms is another aspect to look into. Public sector banks do not charge individual borrowers a penalty for loan prepayment, but many private banks and NBFC do not allow very early prepayment and may also charge a fee for early loan closure.

The terms need to be checked carefully as well, advises Mahalingam. He says that some lenders require that you pay EMI in advance as opposed to paying it at the end of the month. This can lead to interest rate appearing lower.

Likewise, you must ensure that the loan interest is based on reducing balance, where the principal amount decreases after each EMI is paid, advises Adhil Shetty, CEO of BankBazaar.com. Lenders also insist that the vehicle be covered by a comprehensive insurance. You have to factor in this cost as well.