A car is a necessity in today’s time, but buying one can be a bit heavy on your wallet. If you do not have enough funds to get a car, fear not because you can always apply for a car loan.
But what exactly is a car loan, and how do we apply? Is the process complicated? What are the eligibility criteria for car loans? And the questions never end. Here we have provided the basics that you would want to know before applying for a car loan.
What is a Car Loan?
You get a loan from a bank or a money lender at a reasonable interest rate to buy a car. The car can either be brand new or second-hand. The car that is dealt with is kept as collateral and the bank is authorized to sell it if the payment is not fulfilled on time.
The car loan can be divided into different categories depending upon the situation and other factors. Down below are the three main types.
Loan for a used or second-hand car: A second-hand car is already used by other people. There is also a provision for the financing of such cars by the banks. Usually, banks do not finance a car more than three years old as the prices constantly decline in the market. The rate of lending can range from 50% to 90% of the car’s value at the present time.
Loan for a new car: Financial institutions lend money to the borrower to purchase a brand-new car in this type of loan. Though the lending rate can differ in banks, almost 80% to 85% of the cost can be covered through the loans. The car itself acts as collateral and the borrower pays through EMIs within a fixed tenure. The bank is also eligible to siege the car in case of delay in the payment.
Loan against a car: In this, a loan is given by the banks to meet the basic needs of the borrower against a car. That is, a car is held as security in exchange for a loan. It is given based on the current market value of that car.
SOURCES OF CAR LOANS
A car loan can be provided by a bank or by an individual lender. Both of them have their pros and cons that are mentioned below.
Bank credit- Bank credits are the best ways to borrow a loan as the rates are affordable due to competitiveness. The rates are not biased, and lending or borrowing is under some rules. Although there can be some inconveniences regarding the time and duration of loans, it is a safer option to consider.
Individual Lender- The interest rates, in this case, are flexible depending upon the person. If you’re borrowing from a relative, then there can be no pressure of fixed tenure. It is easily accessible, and the money can be lent instantly. Some of the risks may include bitterness in the relationship if one fails to return the money on time.
APPLICATION PROCESS FOR CAR LOANS
Getting a loan can be tedious as it involves a lot of steps followed to keep everything in check. They are as follows:
Form filling: It is the foremost step for any formal process. The borrower submits details such as name, phone number, bank account details, the reason for the loan, and other personal details.
Verification of documents: Since it is a profound matter concerning money, verification of every document is necessary. Only after the approval of documents, the process could proceed.
Approval of loan: The third step involves approval in which securities are stated to the borrower. This step is crucial as the time duration, the amount of loan and interest rates are discussed under this category.
Distribution of loan: After all the formalities are done, the loan is distributed to the borrower against the security which in this case is the car. This process itself can take up a few days.
FACTORS DETERMINING CAR LOANS APPROVAL
Car age: It is one of the essential features for the determination of your car loan. If your car is too old, it will hold no value in the market, and hence, it cannot be held as security.
The market value of every car decreases every year. That is why, if the vehicle is more than three years old, banks will hesitate to lend you money on it.
Repayment of car loan: Every loan is given prior information about the fixed duration it has to be returned. The time is generally one to seven years for a car loan.
THINGS TO KNOW BEFORE APPLYING FOR A CAR LOAN
Certain things should be kept in mind while applying for a car loan in any case. The one who wishes to borrow a loan must be fully aware of all the terms and conditions of the bank from which it is borrowing.
If you are borrowing a loan against a car as its security, you must weigh the car’s value in the current market system. All the damages including tear and wear must not be neglected as they can further deteriorate its value.
BASIC TERMINOLOGIES
Some commonly used terms in these fields which are not popular in daily life are as follows:
- In some instances, a commission is paid beforehand to obtain money from the lender, known as front-loaded money.
- If a car is sold within three months and money is transferred to the dealer then it is known as a holdback.
- Money is given at an annual interest rate which is known as the annual percentage rate or APR.
- The time limit to return all the money plus interest is called tenure.
This brings us to an end, and we hope that this guide proves helpful to you. Applying for a car loan can be a bit tedious and time-consuming. However, if we have the basic knowledge, then we can be prepared for what’s coming our way.
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