What is a Car Loan?

A car loan is a secured loan offered by financial institutions for purchasing a vehicle. The car itself acts as collateral until the loan is fully repaid.

Interest Calculation Methods

Two primary types:

• Flat Rate: Interest is calculated on the entire principal amount for the full tenure
• Reducing Balance: Interest is charged on the outstanding balance, leading to lower total interest

Key Features

• Loan up to 90-100% of on-road car price
• Flexible tenures and repayment options
• Quick disbursal and minimal documentation
• Fixed or floating interest rates available

Credit Score Impact

Creditworthiness affects approval and rates:

• Score of 750+ improves chances and lowers interest
• Loan rejection may impact future borrowings
• Timely EMI payments improve score

Tax Implications

• No tax deduction on car loan interest for personal use
• Interest on loans for business vehicles may be deductible
• Maintain records if claiming for business

Prepayment and Foreclosure

Prepaying can reduce total interest but may include charges:

• Check for prepayment/foreclosure fees (typically 1–3%)
• Some lenders allow partial prepayment without penalty
• Foreclosure early in tenure yields highest savings

Down Payment Strategy

Higher down payment lowers EMI and interest burden:

• Avoid 100% funding unless necessary
• Use trade-in/exchange value to reduce financing need
• Maintain a balance to preserve liquidity

Insurance & Add-ons

Additional costs often bundled with car loan:

• Comprehensive car insurance (mandatory)
• Extended warranty, service packs, etc.
• Confirm if included in financed amount