Personal Finance

Cashing in on your car

Nalinakanthi V | Updated on September 02, 2018 Published on September 02, 2018

Loan against car can help you borrow money at reasonable rates

If you own a car, it can come handy when you need money for either professional or personal purposes, without having to sell it. Loan against car can help both salaried and non-salaried individuals borrow money at reasonable rates.

Most banks, and many non-banking financial companies (NBFCs), offer loan against car. Banks typically charge 14-17 per cent. HDFC Bank, for instance, offers 14-16 per cent. Axis Bank charges 15-17 per cent. NBFCs typically charge 1-2 per cent more than banks. For self-employed professionals, loan against car — a secured loan — may still work out cheaper than a personal loan, which is an unsecured one.

What determines interest

The quantum of the loan and the interest rate on your loan against car depends on three parameters. First, the vintage, model and make of the car. If you are looking to borrow against a recently purchased first-hand car, the chances of you getting a good deal on the interest rate are high. Also, the value of the loan can be much higher for a new car. Likewise, if you own premium brands or fast-selling brands, you can expect some concession in the interest rates and also a higher loan amount.

The second aspect which has a bearing on the interest rate is the customer profile. If you are a salaried employee working for a large, prominent institution, the chances of getting a better rate are high. In contrast, self-employed individuals seeking loan against their car may have to shell out higher interest; this is due to the higher risk arising out of inconsistent cash flows.

Finally, the track record of the borrower is an important factor. If you have a strong credit track record, you may qualify for a higher loan amount. For instance, the loan amount can go up to 150 per cent of the current value of the asset for customers with a strong repayment track record.

If you bought your car with your own funds, you can take a loan against your car. In case you have a credit history, with any other past or ongoing loan, the bank will decide on the quantum and interest rate based on your repayment track record.

If you bought the car through a loan that is ongoing, you can still apply for a top-up loan. The loan amount (loan to value) is typically 75-85 per cent of the car value. However, in some cases, the bank may approve a loan value as high as 150 per cent of the car value, if the credit profile and track record is very good. However, given that the amount over and above the LTV is unsecured, banks will charge a higher interest for the top-up portion. Hence the overall interest rate in such cases will be higher compared with loans given up to LTV.

If you have an ongoing car loan, refinance is another option. Here, you can repay your existing loan with a new car loan from a different bank that offers a lower rate of interest. Based on your profile and repayment track record, banks may consider a high loan value, say, more than 100 per cent of the asset value of the car. However, you need to be willing to pay additional interest for the unsecured portion of the loan.

Besides the interest payable during the loan tenor, the borrower will also have to pay other charges such as processing fee and for valuation report. HDFC Bank, for instance, charges 1.5 per cent as processing fee, subject to a minimum of ₹2,500, capped at ₹5,000. Axis Bank charges ₹6,000 as processing fee or 1 per cent of the loan amount, whichever is lower.

Valuation report forms the basis for determining the loan amount. Banks such as HDFC charge a flat fee of ₹500 for the valuation report. If you want to foreclose the loan, you cannot do so before completion of six months.

If you have taken loan from HDFC Bank, foreclosure charges after completion of six months but before completion of one year is 6 per cent of the principal outstanding. For foreclosure after one year but before completion of two years, HDFC Bank charges 5 per cent of the outstanding principal. Axis Bank charges 5 per cent for foreclosure after 180 days from the date of disbursement.

Advantages

Loan against car offers some advantages vis-à-vis personal loan. First, there is less scrutiny on the financial parameters since the former is a secured loan. Also, the processing time for the loan is shorter (within 3-4 business days). While loan against car is a good option for self-employed individuals who may otherwise have to shell out more on personal loans, salaried employees, particularly with leading corporate houses, may still find it cheaper to take an unsecured loan.

The writer is co-founder, RaNa Investment Advisors.

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