How to Apply For a Car Loan in 5 Easy Steps

Highlights:

• Check for pre-approved loan offers.
• Maintaining a credit score of above 750 is advisable. 
• Never settle for the first loan offer you get, and always negotiate with your lender to secure the best deal.
• Keep all your documents handy, including address and income proof.
  

Buying a new vehicle is an exciting yet significant financial decision. Once you’ve decided to buy a car, gathering the necessary funds to purchase your favourite vehicle will be one of the main things you need to consider. Therefore, it is essential that before applying for a loan, you gather all the information about the motor vehicle loans available in the market and thoroughly understand their terms & conditions. After that, you can apply for the car loan by following these five simple steps.

Check Your Credit Score 

Before applying for a car loan, it is essential to have a healthy credit score to get prepared for your loan application. A high credit score means a cheaper and faster way to borrow money with lower interest rates.


For a healthy credit score, it is important to have a good credit history, and one can ensure that by paying credit card bills and loan repayment on time, reducing existing debts, and avoiding new credit inquiries.


If you have a low credit score, we recommend that you first improve your credit score before you apply for a new loan. 

Choose Your Lender

It is important to have a budget and know how much you can easily repay. There’s a thumb rule that says not to spend more than 10% of your take-home income on a vehicle. 


Once you determine how much you can afford to repay a monthly car payment, it is equally crucial to conduct thorough research about all the financial institutions offering car loans and understand their terms & policies. 


Look for pre-approved offers, analyse and compare their interest rates, processing fees and loan foreclosure charges across different banks and NBFCs. Check for offers, and find the best lender with the lowest possible rate of interest that is suitable for your needs and can save you money. 

Evaluate Loan Repayment & EMI Amount

Once you decide on your lender and the borrowing amount, it’s time to apply for the car loan. But before that, you can use a car loan calculator available on various banks and auto tech websites to examine the EMI amount that you will be paying based on the loan tenure, loan amount and rate of interest. 


Various institutions provide EMI-holidays or 100% financing on your new car, but we recommend that you avoid such offers, as you might end up paying a high interest amount, as the loan tenure will be long. We advise you to pay at least 20% to 40% amount of the on-road price of the car as the down payment. This way, you can lower your loan amount, reduce total interest paid, and steer clear of an unfavourable outcome.

Proceed With Your Car Loan Application

The next step is to process your loan application. Arrange all your documents like valid ID proof, current and permanent address proofs, income proof/bank statement and ITR of the last three years. Keep all these documents handy to avoid any last-minute interruption in financing your car and speed up your approval process.


Once submitted, the lender evaluates your complete profile, and after carefully verifying your documentation and credit history, the loan is approved, and a sanction letter is issued mentioning the loan terms.


Pro Tip: Loan terms are generally negotiable. Therefore, it is important to ask for a waiver of documentation charges and processing fees before finalising your loan application. However, it is only possible if you’ve a high CIBIL score and a stable income with a clear repayment history. 

Bring Your Vehicle Home

Once you are done with all the above steps and submit your loan application successfully, the lender will disburse your approved loan amount directly to the car dealer, allowing you to bring your dream car home. 


It is worth noting that the financier’s name also comes on the Registration Certificate (RC) as the hypothecating party, which indicates the bank/NBFC has the legal right to the vehicle until the loan is repaid. 

Tips to Get the Best Car Loan Deal

Thoughtful planning and smart budgeting are crucial when purchasing a new car on finance. Here, we've shared the expert-backed tips to secure the best car loan deal: - 


1. Always maintain a healthy credit score of over 750+ to secure the fastest loan with a lower interest rate.


2. Plan your purchase, as most brands provide attractive discounts and offers around the festive season and year-end.  

3. Don’t make impulsive decisions. Stick to your needs & requirements and make your buying decision accordingly. 


4. Never settle with the first loan offer you get. Compare interest rates, processing fees and loan foreclosure charges across different lenders to get the best deal for you.


5. Check for hidden fees like documentation charges and stamp duty, and bargain with your lender for waiver of such levies. 


6. Try to pay a higher down payment (at least 20% to 40%) to lower your loan amount and loan tenure.


7. Always read the term sheet thoroughly to avoid any last-minute surprises. 


8. Keep your EMIs within 30-40% (upper limit) of your monthly income.

FAQs

1. What is a car loan?

Money provided by banks, NBFCs or any other financial institution to purchase a vehicle is called a car loan/motor vehicle loan. One needs to repay this amount every month over a fixed tenure.


2. What is the maximum loan amount one can get to buy a new car?

The loan amount can vary depending on your profile, income source, credit history and the overall credit score (CIBIL score).


3. What is the minimum credit score to secure a car loan?

Generally, there's no specific limit to secure a car loan. However, a credit score of over 750 is considered excellent and allows you to get a higher loan amount at the lowest possible interest rate.


4. Why is a higher down payment advised by experts?

Most experts advise a high down payment to reduce your overall loan amount and the interest you pay on that. 


5. Can I get 100% funding on my new car?

Yes, some banks/financial institutions offer up to 100% funding on the on-road price of the new car. But it is advisable to stick to 90% loan to avoid getting into a lose-lose situation.