Cars are never just a vehicle; for many of us, it is a passion whereas for some others it is a necessity. The car is the next big investment for most of us after investing in a home. Car buying is indeed very exciting and it requires a lot of effort too which includes research to find the best car within your budget, financing options available, the add-ons of your car etc.
Among all the efforts one has to put, finding the right financing option or the vehicle loan is very significant. Cars are always costly so are the mistakes of car loans. Choosing the wrong financing partner or being unaware of terms and conditions may hurt your pocket in times to come. Today we have compiled some of the common yet costly car loan mistakes to avoid.
Common Car Loan Mistakes
Mistake No 1
Not Checking the Credit Score and FOIR
The credit score and FOIR are the first two calculations that any lender makes before sanctioning a loan. Both the calculations are done to find the creditworthiness of a car loan applicant. The credit score is a numeric expression provided by credit bureaus which depict the past credit behavior of a person. Lenders check the credit score to find if you were disciplined with your previous payment of loans.
The next evaluation is done by checking the FOIR. The FOIR ( Fixed Obligation to Income Ratio). This calculation finds out your present liabilities along with the applied loan. If the total of all payables is more than 50% of the net monthly income, the lender may not grant you the auto loan.
Being an informed borrower, one must check both the CIBIL score and
Mistake No 2
Not Comparing the Loan Options
The financing of a car can be done mainly by two sources. The first is directly from a financial institution and the second one is financing from the dealer. Both options have some pros and cons. Moreover, if you want to choose a bank financing, you are to choose the right bank for the car loan. Similar to a personal loan, the interest rate and terms and conditions may vary from lender to lender. Comparing the financing options can make you save a considerable amount of money in total outgo of the loan.
Mistake No 3
Keeping the Loan Tenure Long
The long loan tenure may sound appealing at times as the monthly outgo become smaller. But never to forget the fact that a car is a depreciating asset. The car value, especially the new car value depreciates very soon. So keeping the tenure longer will hurt in two different ways. Firstly, the cost of borrowing will be higher because of the compound interest rate and secondly, by the time you end up paying the EMIs, the value of the car will depreciate to great extent in the market.
Mistake No 4
The downpayment of a loan is very helpful to minimise the cost of borrowing. The or offers like ‘zero
Mistake No 5
Financing for Add-ons
The car needs a number of add-ons such as parking sensors, car body cover, seat cover, music system etc to make the car experience more enjoyable. Taking all the expenses of add-ons together may come up to a quite big amount. Some of the lenders offer financing on add-ons too. Increasing the loan amount as you want to add accessories to your car is never a wise act. You can purchase all those items from the market at a cheaper price. Paying interest as high as a car loan for the purchase of accessories is never worth.