How car loans works?

Loans Car Loan
1

I’m thinking of getting a car but don’t want to use all my savings. I heard car loans are easy to get but how do they actually work? What should I know before applying?

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2

Here’s how car loan works:

  • You take a loan from lenders(generally banks) to buy a car.
  • You pay down payment(usually 10-20%) of the car
  • The lender pays the rest to the dealer, and you repay the lender in monthly EMIs over a period of 1–7 years.
  • The car stays in your possession, but legally, it’s hypothecated to the bank until you repay the full amount.
  • Once the loan is paid off, you get a No Objection Certificate (NOC) and can remove hypothecation from your car’s RC.
3

I am planning to buy my first car with the help of a loan, but I’m not very familiar with the process. Can you explain how a car loan works, including how the EMI is calculated and what factors I should keep in mind before applying?

4

If you’re buying your first car with the help of a loan, it’s natural to want clarity on how the process works. A car loan is essentially a type of secured loan that banks and financial institutions provide to help you purchase a vehicle.

You borrow a certain amount (loan principal) and repay it over a fixed tenure through EMIs (Equated Monthly Instalments), which include both the principal and the interest.

The EMI is calculated based on three main factors:

1. Loan Amount (Principal): The total amount you borrow after your down payment.

2. Interest Rate: Usually fixed for car loans, which means your EMI remains the same throughout the tenure.

3. Tenure: The repayment period, which can range from 1 to 7 years.

Most lenders finance up to 85%–90% of the car’s on-road price, while you contribute the remaining as a down payment. Some banks may even offer 100% on-road funding depending on eligibility.

Before applying, keep in mind:

• Eligibility factors such as your income, employment type, and credit score.

• Additional charges like processing fees, prepayment penalties, or foreclosure terms.

• Loan tenure choice, as longer tenure reduces EMI but increases overall interest paid.