Fix your EMI

Taking a car loan involves less paperwork than taking a home loan. The application process usually goes as follows: you make an inquiry with a lender; submit the necessary documents; theres a visit by a representative of the banks field investigation agency; and then the loan gets approved.

Documents required. Various documents such as proof of identity,proof of income,and proof of residence are required. The exact documents asked for vary from lender to lender. Documents pertaining to the car,new or old,are also required.

Types of car loans

Earlier banks used to offer only fixed-rate car loans but of late they have also begun offering floating-rate car loans. The interest-rate differential between a floating-rate loan and a fixed-rate loan is normally around 50 basis points.

Schemes available

On July 1 State Bank of India SBI launched a car loan scheme called SBI Ezee for financing new cars at an interest rate of 8 per cent for the first year and 10 per cent per annum fixed for the second and third year. The interest rate will be reset from the fourth year at the card rate. The SBI car loan card rates are 0.25-0.75 percentage points below the banks prime lending rate PLR. SBIs Ezee Car Loan Scheme offers full waiver of processing fee. The scheme is on till September 30.

In the current scenario,opt for the bank that offers you the lowest interest rate. Public sector banks PSBs other than SBI offer car loans in the range of 9.5-10.5 per cent whereas private sector banks offer them in the range of 12-14 per cent. Besides interest rates,one factor to be taken into account while deciding on the lender is the margin amount that one needs to pay: it is higher in the case of PSBs than in the case of private banks.

Recently IDBI Bank has reviewed its auto loan rates,reducing them by 100 basis points across all segments. The revised fixed rate of interest for a three-year tenure ranges from 10.5-12 per cent,and for a five-year tenure,from 10.75-13 per cent per annum.

Interest-rate scenario

Currently interest rates are on the lower side of the cycle. High government borrowings and an expected rise in inflation are likely to take rates higher in future. The RBI is likely to begin tightening its monetary policy some time next year which will push rates higher within the economy.

Bottomline

While taking a car loan a few things must be kept in mind. First,go for the loan that is cheapest. Second,remember that a car is a depreciable asset. It is not an asset,such as a house,whose value will appreciate in future. You also incur costs on the cars fuel,maintenance and insurance. So go for a car loan only when you are assured of stable cash flows in future. Three,go for a fixed-rate loan. Says Veer Sardesai,a Pune-based financial planner: Looking at the current interest-rate scenario the fact that interest rates are near their bottom and are likely to move up in future one should go for a fixed-rate car loan. It will also provide stability to your financial planning.

The concessional rate offer by SBI for the first few years also looks attractive and may be opted for.