Post-COVID-19, many banks like IDFC FIRST Bank have witnessed a spike in demand for car loans. This is because COVID-induced problems have frightened many, which has made them rethink their preferred transportation mode. To avoid travelling by public vehicles, many have turned towards four-wheelers to reduce the chances of the spread of infection.
As buying a vehicle requires massive funding, many to realize their need for owning a vehicle turn towards car loans.
Tips to help reduce your interest rate on a car loan
1. Work on your credit profile
A credit profile is essential in getting your new or used car finance application approved. A higher credit score is essential as it improves your chances of getting loan approval. You can improve your credit score by following simple credit habits.
These include:
- Repaying your credit card or loan bills on time and in full,
- Maintaining a credit utilization ratio (CUR) of within 30 per cent,
- Keeping a check on your co-borrowed or guaranteed loan accounts for timely repayments,
- Checking for accuracy in your credit report,
- Maintaining a balanced mix between secured and unsecured loan options etc.
If you follow all these credit habits, you will have a good credit score, which will indirectly enhance your chances of securing a car loan approval at the lowest interest rate. With this said, it is still possible to obtain vehicle financing options with a fair credit score, as many lenders will simply offer higher interest rates on repayments. Not all hope is lost!
2. Lower your existing liabilities
To ease your chances of securing a new or used car loan, the initial step you must take is to repay all your existing debts or at least reduce them by a considerable margin. Having significant debts may make lenders question your possibility of repaying the car loan EMI on time. Thus, to enhance your car loan eligibility chances and become a suitable candidate to avail of the lowest car loan interest rate, ensure to prepay the maximum of your outstanding debts.
If this is impossible, opt for the longest possible repayment tenure on a car loan to reduce your EMI burden. However, note that this will enhance your overall interest cost.
3. Apply with a co-applicant
Making a loan application with another earning member in your family can enhance your car loan eligibility chances. You can add your parent, spouse, or sibling as a co-applicant. Adding a co-applicant allows the lenders to consider both of your incomes, enhancing your chances of securing the required loan amount at a lower interest rate.
However, co-applicants must remember as lenders consider you too as a loan borrower like the primary borrower, your credit profile also is adversely impacted in case the primary car loan borrower fails to make the payment on time. Thus, if you are a co-borrower, keep a close watch on your co-borrowed accounts.
4. Make a higher down payment
When opting for a car loan, you must make a down payment of a minimum of up to 10 per cent of the car’s value from your funds. Lenders like IDFC FIRST Bank fund the remaining amount. However, it is recommended to make a higher down payment. Making a higher contribution from your pocket as a down payment lowers the lender’s credit risk, increasing your car loan eligibility chances.
Doing so also reduces your overall loan interest cost and enhances your chances of securing a lower interest rate on a car loan. However, remember, in pursuing a higher contribution as a down payment, do not compromise on your investments and emergency fund. This may force you to opt for higher interest-cost loans in the future to meet your financial difficulties or fulfil crucial goals.
Always ask the lender about prepayment and processing fees when applying for a used or new car loan. Ensure to negotiate this charge as much as possible, as doing so will reduce your overall interest cost. Also, ask for any applicable hidden charges and clarify your doubts about the hidden fees. Only a few banks like IDFC FIRST Bank are transparent about their charges.
