How to Select the Right Bank for Car Loan

Owning a car has become a necessity in today’s society but not everyone has the means to pay for a new or used car in lumpsum. Hence, a car loan is the convenient and logical solution for buying a car. In India, approximately 80% of buyers apply for a car loan. It is important to analyze various available options when you are trying to choose the best bank or financing firm, to avail car financing from. Since there are several banks and financial institutions which offer loans with varied benefits and privileges, choosing the right bank for a car loan has become much more difficult. There are various factors to be considered before zoning in on the right bank. Let's take a look at some of them:

Access and Eligibility: Most banks have a rigid eligibility criteria compared to private finance companies or the financing offered by car manufacturers. However, the payback period of a car loan taken from a car finance company is only upto a maximum period of five years. Banks, on the other hand, provide up to seven years tenure for payback of loan.

Payment structure: Banks often offer attractive interest rates to reel in customers but rather than falling for that marketing gimmick, it is important to understand the payment structure of a loan. A bank or an institution usually offers a discounted rate for a limited time period and later on make a sharp increase in the rates. In such situations, it is difficult to analyze whether it is affordable to take up the loan since interest rate increases exponentially at a later date. The mode of payment has to be affordable and convenient, and it should also match the cash flow generated by you. A move to a longer term loan and a simple payment structure is in your benefit, so look out for these factors in a loan provider.

Interest rate: This is one of the crucial factors that have to be looked into before determining the right bank. The car loan interest rates for banks remain same whereas the car finance companies work on a preferential basis. The interest rate offered by private firms depend on several parameters such as product and tenure, credit report, risk ratio, etc. It is not just enough to focus solely on the interest rate but also on the method used for interest rate calculation.

Loan fees and charges: Another important factor to be considered while selecting the best bank for car finance is the initial cost of the loan – i.e. annual fee, processing fee, late payment penalty and prepayment charges. Processing fee keeps fluctuating from bank to bank and mostly depends on the total amount of the loan. Most public banks like State Bank of India, Bank of Baroda, Bank of India, Federal Bank and Canara Bank, do not levy prepayment charges. Whereas, the private banks such as HDFC Bank Ltd, ICICI Bank and Axis Bank Ltd., levy prepayment charges. Late payment penalty remains the same for both. Thus, it is important to closely examine total cost of the loan and EMIs including interest rate and other fees and charges.