Should you really finance a car?

Prep yourself first before you go out in search of your new car.

Speaking calculatively, it is always best to purchase cars outright on cash, and anything else as a matter of fact, because it saves you from having to pay interests on them. Plus when you’re paying interest on something that depreciates every year, you’re probably losing money both ways.

But there are a lot of reasons that make us consider otherwise. Many a times even though you have the cash, it may be used in other purchases and investments. Other times, you lack the cash at the moment, but it is strongly associated with your emotions; the desire to own a car (not technically though. The car becomes yours only after you’ve completed your EMIs).

The only thing banks want assurance in is your ability to pay for it. Loan Department Head at Sunrise Bank, Ganesh Regmi says, “the first priority for banks is always the customer’s repayment capacity. If they demonstrate themselves as a credible, genuine customer whom the bank can rely upon to pay back the dues on time, then there won’t be much problem in getting the loan approved.”

But hey! you can’t pay them back early too. They charge you for that as well. A bit of a tricky jelly this is, isn’t it? This happens, for example, when you try and pay back your loan taken against a tenure of 5 years, in 3 years. They call it prepayment fees. Unless the interest rates have gone up. These interest rates are a floating variable, such that they may go up or down based on the future market rates. Only when the rates has been increased will there be no charges if you wish to finish the tenure early.

These financial institutions usually finance 80-70% of the asset, while the rest requires down payment. This is broken down into equal monthly installments that can be found out easily. (there are a lot EMI calculator apps and websites). There is usually a service charge of 0.5% to 1% levied by the banks. They cross check your past records with the credit information bureau to know if you’re good to go (yes! they know your credit history), and if everything seems good, voilà! you’ve got yourself a new car.