The current credit system can be a dangerous pitfall for even billionaires. However, an informed and calculated decision about taking a loan would keep you out of trouble. This article will discuss common mistakes that people make while taking a car loan. These mistakes are common when taking small loans like second-hand car loans, a small personal loan, house repair, or renovation loan.
A car is seen as a status symbol in Indian society. However, owning a car remains a dream for many families, given India’s average salary. Several financial institutions provide financial help to people with this dream. Smaller EMI with no down payment is necessary for people from weaker economic sections to buy a car. A second-hand car loan comes in handy as the loan amount; hence the EMI is smaller. Used car loan interest rates tend to be slightly higher than car loans as the loan amount is smaller. However, the anticipation of buying a car, and rightly so, can lead people to make widespread mistakes that cost hugely. So, what are these mistakes? Let’s take a look.
Not checking the credit score and FOIR
The credit score and FOIR are two crucial parameters that lenders use when deciding about giving out a loan. The credit score is an evaluation of the past credit history of the applicant. The credit score also determines the interest rates which will be offered to a particular lender. A lower credit score means higher interest rates and vice versa.
FOIR (Fixed obligation to income ratio) is calculated based on personal liabilities versus income. If the personal liabilities or monthly bills exceed a certain percentage of the monthly income, a person is ineligible for the loan. Check these two parameters before applying for the loan. Otherwise, you may find the door to the second hand car loan getting shut in your face.
Drawing out the loan for long term
This is another common mistake that a large number of people are prone to make. Having lower EMI may be lucrative but keep in mind the higher used car loan interest rates. The applicant may end up paying about double the principal amount. Keeping the loan term for a shorter time is necessary given the higher depreciation rate of used cars. You may find yourself in a situation where you have to pay the EMI’s, but the vehicle has become unusable. A very discerning case for many.
No down payment
No downpayment is a lucrative option, where you can drive the car out of the car sale without paying a single penny. A perfect example of when things seem too good to be true, they are probably false. Zero down payments imply that you would be paying a higher amount later on, resulting in more interest rate outflow. A second-hand car loan with zero down payments also has more hidden charges, which occasionally get overlooked by an unsuspecting applicant resulting in higher financial costs.
Not considering different loan options
There are usually two sources of financial backup for buying a car. One is financial institutions such as banks and FinTechs; another is the dealership itself. When looking for a loan from financial institutions, look for the best option without getting overwhelmed. The prospect of finance at the dealership is particularly lucrative as it seems to have little hassle. However, keep in mind that the terms and conditions and used car loan interest rates vary significantly from one prospect to another.
Not shopping around
The market is enormous for second-hand car loans. It is essential to consider different markets when making such a big financial decision. Keeping calm and taking the help of experts around you might help you secure a better deal and reduce the risk of making a huge financial mistake.
Taking a second-hand car loan is an important decision. You need to watch out for the points mentioned above before taking your car loan. Do not commit these mistakes for a hassle-free loan procurement process.
