10 Common Mistakes to Avoid When Getting an Auto Loan

Most people today aspire to own a car at least sometime in their lives. And in most cases, people find auto loans to be the most convenient way to purchase a vehicle. Buying a car on finance is not a bad deal at all as long as you are careful about a few aspects. The right car loan can not only help you avoid spending all your savings, but also help you with flexible repayment plans and numerous other features. However, many times, car buyers make some common auto loan mistakes that they should avoid. Here is a list of 10 of them

10 Common Auto Loan Mistakes You Should Absolutely Avoid

Not all options are weighted

This is one of the most common mistakes people make when applying for a car loan. Many dealerships have tied up with a particular bank. And in such cases, the salesman forces you to choose the services of that bank as the best option. But in most cases, it is not true. Hence, it is always a good idea to talk to multiple banks and pit them against each other. Chances are that your own bank that you have a savings or checking account with will offer a fantastic car loan. So, never rush and research well before choosing a bank for taking a car loan.

Don’t know your CIBIL score

Most of us have no idea about our CIBIL scores. This is a bad idea because a credit score clearly reflects how a particular bank will treat you when granting you a Auto loan. The lower the credit score, the higher the car loan interest rates. In fact, many banks actually avoid giving loans to people with low credit scores. So, find out your CIBIL score for car loan and then apply for the loan after careful financial planning.

It does not account for the total payment you make

Many people opt for car loans based on the monthly installments they pay. While it is important to know what one’s monthly payments will be as it helps him or her plan his or her finances accordingly, it is also important to note the bigger scheme of things. The full cost of a car loan, which includes the amount borrowed (principal) as well as interest, is much more readily available than borrowing.

And the longer the tenure of the loan, the higher the obligation to pay interest. Hence, one should avoid one of the most common car loan mistakes and decide the loan tenure based on the interest he is comfortable paying.

Taking a longer Auto loan to pay smaller EMIs

As explained above, the longer the Auto loan tenure, the higher the overall interest paid. Of course, EMIs are smaller for longer Auto loan tenures but you end up paying much higher returns in the long run. So, basically, the longer the tenure, the longer you will repay the loan. And the longer the loan tenure, the more you pay the bank.

Choosing zero down payment

Zero down payment is basically a trick that many banks use to get you to lend a large sum of money. This ultimately means paying huge interest. While zero down payment schemes may sound appealing, opting for them is one of the most common auto loan mistakes. Therefore, it is always a good idea to make the highest possible downpayment. This leads to less borrowing and hence lower interest.

Not checking the availability of pre-sanctioned Auto loan

Most banks offer pre-approved Auto loan to their preferred customers with good credit scores. Such offers are always slightly better than the usual loan schemes offered by banks. So, if you are a good customer of your bank, chances are high that you have a pre-approved auto loan scheme on offer.

Rush into the process

Another common mistake people make while opting for a car loan is to rush through the entire process. By rushing, we mean making all the mistakes listed above. So, it pays to take your time, contact multiple banks and choose the best offer. The first offer you get, which often comes from the bank the dealership has tied up with, isn’t necessarily the best offer on the table. Also remember that salesmen will always try to rush you into making a decision. However, step back in such a situation and take your time before deciding anything.

Not accounting for future financial changes in your life

Before opting for a car loan one should always take into account the financial changes that will occur in one’s life. As one needs to pay a significant portion of his salary in EMIs, he should always think whether the financial situation will remain the same in the years to come. While thinking about this, aspects like market dynamics, inflation and job stability need to be considered.

Does not take into account early pay-off penalties

Only few banks in India allow free partial repayment/early repayment of auto loan. Most banks will ask you to pay a penalty in case of partial or full early repayment. So, if you sign up for a 5-year loan term and you want to pay off your loan in 3 years, the lender will charge a penalty to make up for the lost interest. This is easily one of the most common auto loan mistakes you should avoid.

Don’t try to refinance bad loans

Even if you make any of the common car loan mistakes listed above, you can get yourself out of a bad situation by refinancing the loan from a different bank that is willing to offer better terms. You can either opt for a loan offer that has lower car loan interest rates or, perhaps, extend the loan tenure if you find it difficult to pay the monthly EMIs.

Conclusion

Always remember all the above points before you opt for a car loan. Only a careful selection of the auto loan offer will help you benefit from the finance scheme. So, always plan keeping in mind aspects like loan tenure, car loan interest rates, future financial requirements, and other factors listed above. Saving that amount of money over the life of the car loan is definitely worth the research and time it takes to refinance and find a better loan.