Don’t just look at EMI in car loan:5 mistakes can make your new car expensive

When buying a car, when it comes to finance and loans, many people make wrong decisions in haste. The dealer tells you an attractive monthly installment i.e. EMI, the bank tells you the interest rate and the buyer’s entire focus shifts to just how to minimize the monthly installment. But do you know that this low EMI can cost you heavily in the long run? Under RBI’s new disclosure rules and KFS i.e. Key-Facts Statements, it is now mandatory to provide complete loan information to customers, yet people sign without thinking. Learn through QA about those mistakes that make your car unnecessarily expensive and how to avoid them: Question: What is the biggest mistake buyers make when taking a car loan? Answer: The most common mistake while arranging car finance is that buyers decide their budget by looking only at the monthly EMI instead of looking at the total cost of the loan. For example, an EMI of ₹15,000 may sound easy, but it depends on how many years you will pay it for. If you increase the loan tenure from 3 years to 5 or 7 years, your monthly installment will reduce, but the total interest amount will increase manifold. Instead of immediately saying yes to the EMI shown by the dealer, always calculate how much total money you are paying back to the bank at the end of the loan. Question: Why is it disadvantageous to accept the first loan offer given by the dealer? Answer: In the name of convenience at car showrooms, people accept the loan offer from the bank or NBFC shown by the dealer without comparison. Dealers have tie-ups with multiple banks, but it’s not necessary that the first offer is the cheapest for you. There are differences in interest rates, processing fees, and other charges among different banks and NBFCs. According to RBI rules, banks must transparently state the all-in cost, i.e., the total cost of the loan. Even a difference of just 0.5% to 1% in the interest rate can save you thousands of rupees over a 5-year loan. Question: What are the disadvantages of making a low down payment? Answer: Initially, making a low down payment seems quite attractive, because more cash remains in the bank account. But a lower down payment directly means – a bigger loan. The higher the loan amount, the more interest you will have to pay and your EMI will also be larger. However, experts advise not to exhaust your entire emergency fund in the pursuit of increasing the down payment. Create a right balance, where your loan remains small and your savings and security fund also remain intact. Question: What should one look for in the hidden charges and fine print of a car loan? Answer: Most buyers only focus on the interest rate and sign the rest of the papers without reading them. Processing fees, documentation charges, insurance-linked costs and prepayment/foreclosure charges (charges for closing the loan before time) make the loan expensive. Under RBI’s new rules, regulated lenders are required to clearly provide complete information about all applicable charges and penalty charges through Key Facts Statement i.e. KFS. Before finalizing the loan, make sure to ask the bank for a written copy of the complete fee schedule. Question: Why is it important to know the pre-payment and foreclosure rules before taking a loan? Answer: Your financial situation may change 1 or 2 years after buying a car. You may receive incentives, bonuses or salary hikes and may want to close your loan early. If you haven’t checked the loan agreement beforehand, banks can impose heavy penalties on part-payment or pre-closure. The rules for fixed and floating rate loans are different. Therefore, find out before taking the loan whether penalty-free pre-payment option is available or not. Question: Does the total cost of a car include only the car’s price and loan interest? Answer: No, this is the second biggest misconception. The actual cost of a car is not limited to just the EMI and on-road price. When you take a car on finance, apart from the EMI, your pocket also bears the burden of insurance, fuel expenses, routine maintenance, servicing, and unexpected repair costs. If your EMI takes up a large portion of your take-home pay, then money will fall short for other essential expenses and investments. Question: How does RBI’s disclosure framework help buyers? Answer: RBI has implemented Key Facts Statements (KFS) and a disclosure framework to provide transparency to customers. Under this, banks are required to clearly write the Annual Percentage Rate (APR) of the loan, total interest, processing fees, and all hidden charges in simple language on a single page. The purpose of this rule is to familiarize the buyer with all financial aspects of the loan so that they can make an informed decision. However, even after information is available, it is the buyer’s own responsibility to compare different offers. What is Key Facts Statement (KFS)? KFS is a document that banks or lending institutions are required to provide to customers before the loan agreement. It contains the loan amount, interest rate, Annual Percentage Rate (APR), processing fee, late payment penalty, and pre-payment charges all in one place. By reading this, you can immediately understand how expensive your loan actually is.