Loan Basics. Cash in on your car

When it comes to a loan for personal needs, the salaried class, particularly those working for corporate houses, may tend to get personal loans more easily than non-salaried individuals. For self-employed individuals/professionals and businessmen, a loan against a car may be a good substitute for personal loans in such cases. Almost all private and public sector banks and non-banking finance companies offer loan against car. Interest rates offered by banks range from 13-16 per cent; NBFCs charge a tad higher. The interest rate for personal loans ranges between 11 and 16 per cent.

Loan against a car can be of three types. One, individuals who own a car which was bought with own funds and don’t have a credit history yet, can obtain a loan against the car as a security. “Besides providing capital for personal or business purposes, this can also serve as a way to create and build a credit track record and score”, explains K Mahalingam, Partner/Director, TS Mahalingam Group which has interests in used-car sales and loan advisory services. In this case, the maximum loan may not be over 70-80 per cent of the car’s value, since borrowers do not have a track record yet.

Another way to borrow against a car is through a top-up loan. If you have a car loan, you can get a top-up loan from the same bank. The loan-to-car value can be as high as 150 per cent for customers with a good repayment record. In case of the loan value exceeding 100 per cent, by virtue of the in-built unsecured portion, it can be priced at a slight premium to that with a lower loan-to-asset value.

You can also opt to refinance your existing loan with a new one from some other bank that offers a better rate. Here again, banks, depending on the asset and borrower’s credit profile, can lend up to 150 per cent of the asset value. This not only helps individuals close their existing loan but also use the balance for their needs. “ It may be better to opt for a refinance midway through the first loan.

For instance, assume you have borrowed ₹5 lakh for your car repayable over 60 months. Considering refinance after completion of at least 30 months can help you get a good interest rate provided you have a good track record of paying your instalments on time and you have predictable cash flows”, says Mahalingam.

While a loan against a car is available to self-employed individuals and businessmen, banks are a bit cautious to lend to those working in some sectors that are under stress such as builders and real estate developers.

With a loan against a car being an asset-backed lending, the model and make of the car and its vintage play a vital role in determining the quantum of the loan. For instance, the loan amount may be higher for leading brands such as Honda, Maruti and Hyundai. Likewise, the value for brands that aren’t fast selling may be relatively lower. Besides the brand, the model of the car and the market acceptance of that model is another factor determining the quantum of loan.

The interest rate charged by banks for loan against car ranges between 13 and 16 per cent, depending on the model, make of the car, customer profile and their repayment track record. In the case of NBFCs, the interest rates are a tad higher. For instance, HDFC Bank and Axis Bank have pegged the rate at around 14 per cent. In contrast Capital First, TVS Credit and Hero Fincorp have an average lending rate of about 17.5 per cent.

Besides interest, banks also charge processing fee and additional fee for valuation report. The valuation report by a third party is a critical factor in determining loan value.

Also, prepayment of the loan attracts additional charges; they may average to nearly 6 per cent. Likewise, foreclosure within two years of the loan start date is charged 3-5 per cent. HDFC Bank charges 3.25 per cent while NBFCs such as Tata Capital charge a higher 5 per cent.

Borrowing against car scores over personal loan on two counts. First, the disbursement time is less than three days; lower than personal or business loan.

Second, the customer’s existing obligation is not critically looked at for loan against cars, given that it is a secured loan.

However, given both personal loans and a loan against a car don’t come cheap, it is always better to use it sparingly.

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