Buying a house stands out as a pivotal financial choice, and for many individuals, the second significant financial decision revolves around purchasing a car. A common approach to fund this vehicle acquisition is through obtaining a loan. Presently, the interest rates for car loans are at their lowest in recent times.
This story will tell you the factors that should be taken into account when determining the appropriate amount for a car loan.
How much loan can you get?
Financial institutions, including both banks and non-banking finance companies (NBFCs), typically extend loans amounting to around 80 percent of the on-road price of a car. In specific instances, some lenders may approve loans covering the entire 100 percent of the car’s cost. The pivotal factor influencing the car loan amount is the Loan to Value (LTV) ratio established by the lender. The LTV ratio denotes the percentage or share of the car’s total cost that the lender is willing to finance. The borrower is responsible for covering the remaining portion of the car’s cost from their own financial resources. Although a majority of lenders offer LTV ratios of up to 80 percent, certain lenders assert the ability to provide loans covering the entire 100 percent of the car’s cost.
EMI payments
When obtaining a car loan, it is crucial to select equated monthly instalments (EMIs) that align with your repayment capacity. Avoid choosing a lower EMI amount and a more extended loan tenure simply because it’s available as an option; opt for such terms only if they match your financial capabilities. This caution is warranted because opting for a lower EMI and a longer loan tenure can lead to unnecessarily higher interest expenses.
Conversely, refrain from selecting higher EMIs if it means compromising your monthly contributions towards essential financial objectives. Regardless of the loan amount, it’s imperative to prioritize EMIs that are comfortably manageable and do not strain your financial resources.For instance, if you are buying a car valued at Rs 15 lakh, do you have enough savings to make the down payment of at least Rs 7 lakh? Say you opt for a loan for the rest, i.e., Rs 8 lakh, what is a comfortable EMI amount for you? A high CIBIL score (750 and above) can help you secure a higher loan amount and better interest rates. For individuals with a credit score of above 750, banks generally cover up to 80 to 90 per cent of the total cost of the vehicle. However, funding a maximum amount as a down payment is recommended as it reduces the high – value EMI payments.
Therefore, even if you qualify for a higher Loan to Value (LTV) ratio, consider choosing a lower LTV ratio. Opting for a reduced LTV ratio can alleviate your EMI burden and lower the overall interest expenses associated with the car purchase. Car loan applicants are advised to aim for a lower LTV ratio, striking a balance that doesn’t compromise liquidity and financial reserves earmarked for significant life goals.
Ideally, the cumulative EMIs from all loans should not exceed 40 percent of your take-home pay. Considering your present circumstances, you can determine the portion of this 40 percent allocation that your car EMI can occupy.
Besides, there are several things to consider before you opt for the right kind of car loan.
What is the 20/10/4 rule when taking a car loan
1.This is a thumb rule used while buying a car on a loan.
2.20% of the onroad price of the car should be paid as down payment while booking the vehicle.
3.The EMI should not be more than 10% of the monthly income.
4.The loan tenure should be for a maximum of four years.
5.This rule will vary from individual to individual, according to their monthly income and other liabilities.
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