Applying for a car loan? From processing fee to down payment, make note of these key points

If you are planning to buy a car for the first time, and are also looking forward to raising a car loan to fund your prized possession – then a small fee that you are meant to incur is the ‘processing fee’.

What is a processing fee?

It is a fee towards administrative costs that is incurred by the bank for processing and sanctioning the loan. This is often a tiny amount, and varies from bank to bank. It could cost anywhere between 0.5 percent to 1 percent of the total loan amount.

After the loan is approved, borrowers are made to bear this fee, and is deducted from the loan amount before it is transferred to the borrower’s bank account.

Processing fee waived off

The good news for loan seekers is that some of the banks have already waived off the processing fee on car loan disbursals.

Bank of Baroda and Canara Bank, for instance, have waived off this fee for loan disbursals until March 31, 2023. Indian Overseas Bank has also waived it off until the end of this month.

It is important to note that this fee can range anywhere between Rs 1,000 to 9,000.

For example, Indian Bank and South Indian Bank charge a fee of 0.5 percent and 1 percent of the total loan amount, respectively, up to a maximum limit of Rs 10,000, shows paisabazaar data.

UCO Bank charges one percent of loan amount as processing fee up to a maximum limit of Rs 1,500; IDBI Bank charges Rs 2,500 as processing fee; HDFC Bank charges 0.5 percent of loan amount as the processing fee which usually falls between Rs 3,500 to Rs 8,000.

Karnataka Bank charges anywhere between Rs 3,000 to Rs 11,000. Federal Bank charges anywhere between Rs 2,000 to Rs 4,500 as processing fee, the paisabazaar data shows.

Interest charged

After you have raised a car loan, you need to calculate your equated monthly instalment (EMI) on the loan. You can use a good loan calculator such as the one given on MintGenie’s website for this purpose.

Here you need to enter three inputs to be able to calculate the EMI: loan amount, tenure (in months) of loan and the rate of interest levied by your bank.

After entering these details, the calculator will promptly indicate the monthly instalment that you need to pay.

Factors that influence the rate of interest

One should be aware of the fact that the rate of interest that the bank charges is a function of a number of factors:

A. Credit score: First of all, the borrower’s credit score is a key factor that determines the rate of interest charged by the bank. Higher the credit score is, lower the rate of interest.

B. Down payment: Another important factor is the down payment that you make. If you make a smaller down payment, the rate of interest could be higher. But when you make a higher down payment, the loan amount would accordingly decline and the bank could give interest at a favourable rate simply because the lender runs a lower risk.

C. Tenure of loan: Usually banks levy a higher rate of interest when the loan tenure is short. Alternatively, when the loan tenure is long, banks tend to levy a lower rate of interest.

D. Model of car: The model of the car also has a bearing on the rate of interest charged by the bank. Since car is seen as an asset as well as a collateral for the purpose of car loan, its model and make are a deciding factors in the rate of interest charged by the bank.

When the car is old and therefore has a lower resale value, banks run a higher risk on loan. This prompts the bank to charge a higher rate of interest.

On the other hand, banks tend to offer a lower rate of interest on the loans that are given to buy newer vehicles with a good resale value.