CAR/ FOUR-WHEELER LOAN:-
Q-1 Are car loan interest payments tax deductible?
Ans- Cars usually come under the category of luxury items and as such no tax benefit is offered on the interest payments, to individuals who avail car or auto loan for the purchase of the vehicle.
However, car loans availed by self-employed individuals for vehicles that are used for commercial purposes are eligible for tax deduction under section 80C of the Income Tax Act, 2016.
Q-2 Do car loans have a prepayment penalty?
Ans- Prepayment of Car Loan is purely a matter of choice based on your financial situation. The key benefit of prepaying a Car Loan is that it reduces the loan amount by decreasing the interest burden and frees the amount of your earnings which are being paid as EMIs towards the loan.
However, most banks discourage prepayment, because it deprives them of their interest earnings and generally put forward the following conditions:
- For fixed interest Car Loans, there is a prepayment penalty levied, which is usually in the range of 3-5% for private financiers and 2% for public sector banks. Additionally, service taxes are also applicable on such payments.
- For floating interest Car Loans, there are no prepayment penalties as per the new guidelines by the RBI. So, you can easily prepay or migrate the loan to a bank that offers a lower rate of interest as compared to the existing loan.
Although, the conditions may vary from bank to bank.
Q-3 How car loan EMI is calculated?
Ans- Car Loan EMI can be calculated in three ways:
- By using mathematical formula, EMI=[ P x R X (1 + R) ^ N] / [ (1 + R) ^N – 1]
Where, P is the principal loan amount, R is the rate of interest per month and N is the number of monthly installments. If the rate of interest per annum is 12%, then the interest rate per month will be 1% (12%/12).
For example, if the loan amount is ₹ 10 lakh, monthly interest is 0.75% (for an annual interest rate of 9%) and number of months is 180 (15 years tenure), using the formula, the EMI would work out to ₹ 10,142.67.
However, calculation through this formula is a bit difficult and more prone to errors.
- By using Excel Spreadsheet, applying PMT function, the periodic payments required to pay off the loan with interest over a fixed tenure can be calculated.
The syntax of the function is as follows:
PMT ( rate, period, pv, [fv], [type] ), where rate is the interest rate per period, period is the number of periods over which the loan has to be repaid, pv is the present value of the loan, fv is the future value of loan and type specifies if the payment is made at the beginning or end of the period.
Let’s understand the formula through an illustration.
Consider a car worth ₹ 7 lakhs. For a loan to purchase the car with a down payment of ₹ 2 lakhs, the loan amount would come to ₹ 5 lakhs. If the interest rate is 12% per annum and the tenure is 5 years, the Excel PMT formula would look like,
PMT(0.12/12, 5*12, 500000), where the period considered in months.
The last two arguments can be safely omitted.
This formula will give you a result of ₹ 11,112.22, in red or negative which denotes cash outflow.
You must add processing charges and other fees to get an accurate result.
- By using EMI calculators, you can calculate your EMI instantly and conveniently, by correctly entering the following details of your loan:
- Loan Amount: Enter the Loan amount you wish to borrow for your Car. Always try to make maximum down payment to reduce the loan burden
- Interest Rate: This is the Interest rate that is charged on the money borrowed. This rate is monthly reducing balance.
- Tenure: Select the period for which you wish to take the Car Loan. Generally, car loan tenures range from 1 to 7 years.
- Processing Fees: Many banks charge a processing fee at the time of disbursing a car loan. It normally ranges between 0 to 2% of the loan value.
Let’s take the above illustration again and calculate EMI using EMI calculator by assuming processing fee of 2%.
The EMI calculator will give the following result:
The EMI calculator will give the following result:
Q-4 Can car loans be refinanced?
Ans- Generally, public sector banks offer car loan at both fixed and floating rates but most private sector banks and non-banking financial companies (NBFCs) offer at fixed rates only. Banks do allow to refinance the loan offered to you at floating interest rates, by charging a processing fee for the same.
Refinancing gives you several benefits like- switch to a lower rate of interest, change or eliminate co-signees to the original loan and alter the tenure of repayment.
However, the existing bank will not allow refinancing on an existing loan, it will only allow a top-up or you can foreclose the existing loan and take a new loan from the existing bank in exchange of some foreclosure charges.
Q-5 Can I get a loan to purchase a used car?
Ans- Yes, car loan is offered for pre-used cars. But, the interest rate for such a loan would differ from that of a new car. However, the loan would only cover the price of the car itself, other costs as transfer of registration, etc. will have to borne by you.
Q-6 Do I need collateral for a car loan?
Ans- A car loan is a secured loan where the car you buy acts as a collateral. Therefore, there is no additional collateral requirement for a car loan. However, you do have to get the RC (registration certificate) of the car endorsed by the bank. This endorsement is cancelled after repayment of the loan is completed.
Q-7 What documents do I need to submit when applying for a car loan?
Ans– Like any other loan that you apply for, a car loan application requires self- attested supporting documents such as- income (last three pay slips/last acknowledged ITR), address and identity proof documents along with your PAN card. Other documentation requirements, if any, may differ from one lender to another.
Q-8 Do I need a loan guarantor or co-borrower?
Ans- A loan guarantor or a co-borrower is only required if you are unable to meet the eligibility criteria stated by the lending institution such as monthly income, age or credit score. Otherwise, you can apply for a car loan on your own.
Q-9 In which cases can my car loan application be rejected?
Ans- Your loan application may be rejected if you have a bad credit score, have defaulted on your repayments or applied for and been rejected for loans multiple times, etc. Also, you should meet the bank’s eligibility criteria such as- minimum income level, age, previous relationship with the bank, etc. to get your loan approved.
Q-10 What if I don’t pay EMIs on time?
Ans- Generally, banks treat you as a defaulter if you fail to pay two or more EMIs in a timely manner. You will initially be charged a penalty or fee and asked to regularise your payments. If you fail to regularise your payments after repeated notifications, the financial institution can legally repossess your vehicle. Subsequently, your credit score will also take a hit and in the future, you will face complications in future loan approvals.
Q-11 Does the implementation of MCLR change the car loan EMI?
Ans- As per the RBI directive, from April 1, 2016, onwards, banks are using MCLR (marginal cost of lending rate) to fix the interest rate on various loans. Currently, the MCLR-based car loan rates are slightly lower than the base rate method that banks used earlier if it is provided at a floating rate of interest. But generally, car loan is available at fixed interest rates, implementation of MCLR didn’t have much impact on it’s EMI, largely the interest rates of floating interest loans such as- home loan, personal loan etc. are affected.
Q-12 Can I sell my car before repayment of the car loan is completed?
Ans- No, you can sell the car to a new owner only when the loan has been paid off in full. This is because you need to a get a NOC from the bank before you can sell your car and the document is released only after you have paid off the car loan in full.
Q-13 Is it necessary to have an account with the bank from which you take a loan?
Ans- There is no such compulsion for you to have an account with the bank. Normally, banks have no problem in giving auto loans to people who do not have an account with them. However, there may be certain privileges you may enjoy with having an account of the same bank you take a loan from.
Q-14 Can I increase the amount of loan that I can take and how?
Ans- Yes, you can increase the amount of loan sanctioned by clubbing your spouse’s income. The spouse then becomes the co-applicant.
Q-15 How can I pay my car loan EMIs?
Ans- Normally, all banks ask for a Post Dated Cheques (PDCs) for the entire repayment period. You can also make ECS (Electronic Clearing Service) payments, which will enable the bank to debit your bank account at a particular date every month towards your EMI payments. Sometimes, the installment is directly taken from your salary if there is an agreement between the bank and the employer.
Q-16 Can interest rates be negotiated?
Ans-Yes, you can negotiate the interest rate applicable to your car loan if you have a sound relationship with the prospective lender. The regular payment of EMIs for previous loan/credit cards you had/have with your prospective lender can fetch you a car loan at a preferred (lower) interest rate.
Q-17 How long will it take to process the loan?
Ans- You can get your car loan within 24-48 hours of completing documentation.
Q-18 What is the maximum amount of loan that I can avail?
Ans-The maximum loan amount approved may vary from one bank to the other. Usually, it ranges between 80%–90% of the car’s on-road price. Few banks even lend 100% of the car’s ex-showroom price. However, the percentage of financing offered depends on the price, type of car and whether you are applying for a new or pre-owned car.
Q-19 What is the difference between a guarantor and a co-applicant?
Ans- Both the guarantor and the co-applicant is responsible for the loan taken by you from the bank. A co-applicant has to repay his or her share of the loan to the bank. On the other hand, the guarantor agrees to repay the loan on your behalf if you make any defaults on the payment.
Q-20 What is zero interest financing? Are there any special terms and conditions related to it?
Ans- Zero percent financing is an offer provided by a few automobile manufacturers in collaboration with the lender. Under this plan, the automobile manufacturer is responsible for paying back the interest on the car loan to the financier instead of the borrower.
There are usually quite a few terms and conditions in case of zero financing options that are not usually applicable in case of a standard car loan such as- the usual tenure of a zero financing loan ranges from 12 months to 15 months hence your premium payments will be much higher than that in case of a standard car loan. Additionally, you often have to pay a much larger down payment amount as compared to the standard car loan.
Q-21 What happens if the car meets with an accident?
Ans- In the event of an accident, the first step is to inform the insurance company. The company then sends a surveyor to assess the extent of damages to the car. Your claim is then processed and the payment will be made by the insurance company in your favor if the bank provides you with an NOC. The bank normally gives you an NOC if you are very regular with your payments. Otherwise, it happens in the bank’s name. Also, in case of a complete loss, the bank would receive the payment directly from the insurance company.
TWO- WHEELER LOAN:-
Q-22 If I am 18 years old student, don’t have a job yet, can I apply for a two-wheeler loan?
Ans- Yes, some banks may allow you to apply for a loan with a maturity period of three years, as long as you have a collateral or a guarantor with a steady source of income and good CIBIL score to support you in the case, you are unable to make loan repayments on time. The banks will demand the following documents if you wish to apply for the loan:
- Proof of identity (Voter ID, Passport, Aadhaar Card, Driver’s License)
- Proof of address (Utility bills, Bank passbook, Voter ID, Passport, Aadhaar)
- Co-borrower’s proof of Income:
- Salaried Co-borrower-
- Last 6 months pay
- 6 months bank statements.
- Self-Employed Co-borrower-
- 2 year’s income tax returns.
- Last year’s Bank statements.
- Proof of business.
Q-23 Will the bank pay the full amount of the two-wheeler?
Ans- Generally, the banks offer 80- 90% of the value of the two-wheeler, depending on the make and model of vehicle you choose. Finance on premium segment motorcycles is restricted to 70% of the vehicle value.
Q-24 Are two- wheeler loan interest payments are tax deductible?
Ans- Like car loan, two-wheeler loan interest payments are also not eligible for tax deductions.
Q-25 Can I pay the full loan repayment, before the tenure of the loan ends?
Ans- Yes, you can. You might be charged a nominal pre-payment fee for the same.
Q-26 How to get a two-wheeler loan with a bad credit score?
Ans- There can be several ways to get a two-wheeler loan even with a CIBIL score of less than 500.
You can easily get the loan if you have a co-borrower or guarantor with a sound credit score, which increases the surety of the paying back the loan.
You can also talk and negotiate with the lender and state genuine reasons for the low credit score. In addition, you can also give the proof of your income and stability to convince your lender to provide you with the loan.
Q-27 Do I need to visit the bank to avail a two-wheeler loan?
Ans- Absolutely not. In fact, in the case of a dealership, the showroom will take care of the things related to the loan sometimes with a representative from the bank available in the showroom itself. Else, you can apply online as well.
Q-28 Will the implementation of MCLR change my two-wheeler loan EMI?
Ans- EMI of your loan will slightly decrease if the loan is availed at a floating rate of interest. But if the interest rate is fixed, then the implementation of MCLR will not affect your EMI.
Q-29 Will I be allowed to switch from a floating rate to a fixed rate of interest or the other way round for my two wheeler loan?
Ans- Yes, some banks make it possible to do so. But, they also charge a conversion rate for the same.
Q-30 Can I get the loan without income proof?
Ans- Finance up to 70% can be provided without income documents to small business owners and people with clean loan repayment records in the past.
COMMERCIAL VEHICLE LOAN:-
Q-31 Can I get a Commercial Vehicle Loan without a bank account?
Ans- No. A bank account is mandatory. In case you don’t have a bank account, you can apply for a new bank account which will be considered even if it has no recent transactions.
Q-32 Do I have the option of pre-paying the entire loan amount?
Ans- Yes. One can pre-pay the loan any time after 6 months of availing of the loan by paying a small prepayment fee on the outstanding loan amount.
Q-33 What are the different segments and funding ranges available?
Ans- Following are the segments and funding ranges available:
- First time Buyer: 80-95%
- Small fleet Operator: 90-100%
- Medium fleet Operator: 100%
- Large fleet Operator: 100%
However, additional funding available on body depending on the customer profile.
Q-34 Do I need a guarantor?
Ans- The requirement of a guarantor depends upon the credit strength and profile, as stated by your lender.
Q-35 Who can be the co- applicants for the loan?
Ans- You can have the following as your co-applicants depending upon your status:
- Blood relatives and spouse in case of individuals.
- Partners in case of Partnership firms.
- Directors in case of Private Ltd companies.
Q-36 What security/collateral do I have to provide?
Ans- No additional collateral required other than the vehicle on which the funding is extended, but in case of partnership firms or private limited companies other collaterals such as- “office premises” can be used.
Q-37 What are the loan tenure options?
Ans- The tenure of the loan can range from a period of 12 months to 60 months depending on the product and your requirements.
Q-38 What are the minimum & maximum loan amounts?
Ans- Loan amount can vary from a few thousand to crores depending upon the specific requirement. Funding can be up to the extent of 100 % of the chassis, body funding can be extended on special requirement & profile.
Q-39 How much time will it take for my loan to be sanctioned?
Ans- The loans are generally sanctioned within 24 to 48 hours of submission of complete documents. However, the time may vary depending upon the nature of the loan, quantum of funding, documents provided by the customer etc.
Q-40 How is the interest charged/calculated?
Ans- Interest is calculated on a monthly reducing balance basis, which means the principal gets reduced at the end of every month and the interest is calculated on the outstanding principal at the end of the month.