Factors to be Considered Before Applying for a Car Loan

Last Updated at: Oct 27, 2020

Owning a car is one of the most significance goals for most young people. The general perception is that you can buy a car only if you have a lot of money. However, if you apply for a car loan, you can convert your dreams into reality without spending a substantial amount of money in one go.

Many people have a dream of driving their own car. At the same time, many of them have a misconception that it is only possible for the people who have enough money to afford the car.  At this point, only car loans come into the picture which allows one to own a car by paying some amount of money of its cost each month in the form of EMIs. But at the same time, one needs to consider some factors before applying for a car loan such as-

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Comparing loan rates across all the types of lenders

Car loan interest rates are not the same with all lenders. They are different from each other depending on the factors such as the car model, repayment capacity, employer, etc. As many banks offer special car loan interest rates to their current customers, one needs to check with the current bank for such offers and then visit online lending marketplaces to compare them with the interest rates offered by the other lenders. Also, make sure to enquire the rates offered by the dealer finance companies or captive car finance companies before taking the final decision.

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Checking EMI affordability

Apart from the interest rates, car loan EMI generally depends on the two other factors, i.e. loan amount and tenure. One should try to check the EMI affordability by deducting their standard monthly expenses, current EMIs, insurance premiums and SIP contribution from their monthly income. And also lenders mainly prefer total loan EMIs, including the car loan EMI, to be within 40 percent of the net monthly income. While a higher EMI will indeed lead to lower interest cost, but not at the cost of the emergency fund or the investments.

Shorter loan tenure

Most of the lenders offer car loan tenures up to seven years. It is better to opt for a shorter tenure as it will reduce the interest cost. However, as shorter tenure leads to higher EMIs, you should make sure that the loan tenure does not cost the overall liquidity and contributions to different life goals.

Lower loan amount

Many lenders finance up to 100 percent of the vehicle’s cost, but it is better to opt for a lower loan amount to reduce the interest cost. While doing so, it is better to not use the emergency fund or redeeming the long-term investments as that might adversely impact one’s financial health in the future. Plan well in advance to save and gather enough funds to make a healthy down payment to reduce the burden of the loan amount.

Going through the processing fee

Lenders charge the processing fee to cover the costs incurred during the evaluation of the loan application. This is generally a non-refundable fee. Many lenders reduce or waive off their processing fees during the festive seasons or through some offers. However, one should make sure that lenders are not charging higher interest rates or other charges to offset their loss from reduction or waiver of processing fee.


Prepaying the car loan amount is a good idea as it will decrease the interest costs. However, car loans taken on the fixed interest rates generally come with prepayment. Some lenders also cap the number and size of prepayment that is allowed during a year or during the entire loan tenure. Thus, while selecting the lender, prefer to select the one with minimum charges and other limitations on prepayment.

Credit Score

Lenders will consider the credit score while approving the car loan application. Many lenders have already started using the credit score for fixing the loan rates. Generally, people with credit scores of 750 and above have the higher probability of loan approval. Hence, try to fetch the free credit report from online lending marketplaces or credit bureaus before making a loan application. This will let one know about their credit score beforehand and give chance to take corrective steps to improve it. Additionally, one may also receive pre-approved car loan offers based on the credit score and other eligibility parameters.

So, are you also planning to buy a new car? Then you should definitely consider these above factors to avoid further confusions. Happy Driving!

Your credit score is one of the most crucial factors that will be taken into account before your application for loan is approved. It is best that you pay at least one third of the cost of the car as down payment. The rest can be paid in equated monthly installments as per your convenience.