When you think of the necessities of modern life, what comes to mind? Your phone, a good internet connection, and of course, your car.
It wouldn’t be far-fetched to say that most people in cities find it difficult to function without a car. With a car, you don’t have to spend time waiting for a bus, a cab, an auto, or the metro. You can travel wherever you want at your own time. This is one of the main reasons why the number of car loans have increased over the years.
This being said, the biggest problem people face while buying a car is that they get so involved in the entire process of choosing the car of their dreams, that they fail to plan their finances adequately. As a result, people tend to struggle to pay their car loan.
In order to ensure that it doesn’t happen to you, here are a few tips and tricks to help you manage your car loan:
1. Make a large downpayment
Probably one of the biggest mistakes people make when it comes to car loans is making the minimum downpayment and then applying for a loan for the rest of the amount.
Why is it a mistake?
It’s simple, really. A smaller downpayment means that you end up taking a larger loan. This, in turn, means more interest payments. So, making a large downpayment will reduce the amount you have to borrow.
You may not want to dig into your hard-earned savings and pay such a large amount and that is understandable. But think of it this way. Using your savings to make a downpayment now means that the loan amount is smaller. This leads to savings in the long run. And it isn’t just savings. This way you will be able to pay each instalment comfortably and won’t end up defaulting on your loan and affecting your CIBIL score.
2. Opt for a loan with a short tenure
Yes, a longer tenure does mean a lower rate of interest, but in absolute terms, you will be paying more interest. This means that your EMI may be low each month, but when you add the amount you have paid to service the interest over the tenure of the loan, the amount is higher with a longer tenure.
With a car loan of a smaller tenure, the EMI you pay each month is higher, however, the total amount you pay as interest is much lower. So, at the end of the loan tenure, you end up paying much lesser than you would have paid for a car loan with a longer tenure.
3. Make prepayments
If there is no fee charged for making prepayments, go ahead and do so. If you have a fixed deposit account or a recurring deposit account that matures during the course of your loan, use the money to repay a portion of your loan. This will reduce the amount you then end up paying subsequently.
4. Research EMIs and interest rates
Like with any loan, do your research before applying for a car loan. Picking the first bank that approves your application may not be the best course of action since the terms of a car loan are different for different banks.
Before you finalise on a loan, it is good to use a Car Loan EMI Calculator. This way you will be able to determine the amount you will have to pay each month for car loans offered by different banks. This will help you decide which bank’s car loan to apply for.
Something to remember when it comes to interest rates is that they are never set in stone. If you have a good credit history and a good relationship with your bank, you can always negotiate for a better rate of interest.
5. Think about refinancing
If during the course of the loan you find that another bank has a car loan which has more favourable terms, you could always consider refinancing your loan. Keep in mind that you may have to pay a penalty on your existing loan if you plan to close it early.
6. Consider debt consolidation
This may not be for everyone, but if you are struggling to pay the EMI on your car loan and on other unsecured loans and credit cards you may have, debt consolidation is a good idea. With debt consolidation, you can take a loan large enough to cover existing loans and credit card payments and pay the EMI only on that one loan. Before opting for this option though, do your research and see if the EMI on this new loan would be lower than the cumulative amount you would have paid on all your other loans including your car loan.
7. Talk to your bank
There’s no telling what life can throw at you so there may be a situation wherein you may not be able to pay the EMI on your car loan for a month or two. Don’t worry about the bank labeling you as a defaulter because they won’t do that unless you miss payments for many months in a row. What you could do though is go and talk to a bank representative. Banks too are looking to recover the monet from you, so they are always willing to listen to you. This could result in the bank coming up with a solution for your situation.
At the end of the day, remember that like with any major expense, buying a car too requires budgeting and financial planning. Before you apply for a loan, use an EMI calculator to see how much you will have to pay each month. This will go a long way in helping you plan and budget. And so will these 7 tips and tricks.