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Know About These Charges Before Applying for a Used Car Loan

Know About These Charges Before Applying for a Used Car Loan
Ever since the pandemic, the market for used cars in India has grown significantly owing to their affordability. However, when planning their budget or comparing offers from different lenders, many people only consider the loan’s interest rate. But did you know there are numerous other fees associated with your loan as well? Few of these are mandatory to pay, while others arise only during unusual circumstances.
 

What is the APR for a used car loan?


The Annual Percentage Rate or APR refers to the actual cost of availing a used car loan. It represents the amount you are required to pay in addition to the original loan amount. APR is calculated after considering the interest rate and other fees associated with a used car loan.
 

Used Car Loan Charges

 
The list of charges applied on a used (or pre-owned) car loan is quite extensive. However, we are only describing the ones that are very commonly applied by lenders.
 
Most of these charges are not mandatory for used car loans and are only applied under unusual circumstances. Accordingly, the charges have been categorized into mandatory and non-mandatory charges.
 

Mandatory charges for used car loans
 

  1. Processing Fees

    This one is perhaps the most common type of fee and applies to almost every type of loan. A processing fee is charged to cover administrative and other costs incurred by your lender in processing your used car loan application. The processing fee for this loan is up to 3% of the loan amount requested, subject to minimum and maximum amounts specified by each lender. In case your loan is not processed because of forged documents, incorrect information, or other factors, the lender is not obligated to refund this amount.
     

  2. Valuation Charges

    The loan amount for a used car loan is determined by the car’s current market value as per a range of factors. A few of these include insurance claims, dents on the car, engine condition, car-related documents, and a few more. If any of the preceding items are found to be unsatisfactory, your car will fetch less value. 
     
    Calculating the value of a used car is a complicated process, and your lender puts in a lot of effort to do so. As a result, they charge a valuation fee for the process, including GST.
     

  3. Documentation Fees

    Your lender will also charge a documentation fee to cover the costs of verifying the various loan-related documents such as KYC, income proof, registration certificate, insurance papers, etc. This is charged at a flat rate plus GST and is non-refundable.
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Non-mandatory charges
 

  1. Rescheduling Charges

    Used car loans in India generally have a maximum repayment period of five years. Assume that you chose this loan and set a repayment period of three years. However, after making regular payments for the first 12 months, paying the same EMI becomes difficult.
     
    In this case, you may request your lender to reschedule your entire repayment. If the lender agrees to your request, they charge some amount for extending your loan term. Rescheduling will benefit you by giving relief in paying off your EMIs without impacting your credit score.
     

  2. EMI Bounce Charges

    An insufficient balance in your account results in EMI bouncing, which harms your credit score and incurs a penalty. The financial institution imposes an EMI bouncing penalty, that includes a GST component, on each ECS or cheque dishonour. To avoid such penalties, it is highly advisable that you maintain sufficient balance in your account at the start of each month to cover your EMIs and other essential expenses.
     
Also Read: All Your Car Loan Questions Answered
 

  1. Foreclosure Charges

    If you want to pay off your loan early, the lender will charge you a foreclosure fee to compensate for its lost interest income. The foreclosure charge varies depending on the tenure. However, borrowers are generally not permitted to prepay the loan before the first 6 months of successful EMI payment. 
     
    Foreclosing your loan as the repayment term approaches its end is not recommended. However, if your credit score is average, selecting this option will help you improve your creditworthiness.
     

  2. Mandate Rejection Service Charge

    Mandate rejection is related to EMI bouncing. This charge applies when you give a post-dated cheque to the lender and promise that after the cheque is processed, the EMI will be paid automatically on a specific date of the month. You can easily avoid this penalty by ensuring that you give your financial institution an ECS mandate direction.
     

  3. Statement of Account Charge

    Your lender provides a free soft copy of a loan statement at a specific interval. However, there may be times when you require a hard copy of your loan account. To provide the same, the lender will charge you a nominal flat fee plus GST on it.
     

  4. Loan Cancellation Charge

    If you change your mind after signing your loan agreement and decide not to proceed with the loan, the lender will charge a flat cancellation fee to cover their loss. Many lenders charge the corresponding interest payments upon cancellation, which are determined from the date the loan was issued to the date it was terminated.
     
    To avoid this charge, it is essential that you read and understand the terms and conditions of the loan before signing an agreement. You must also honestly assess your own financial ability to repay the loan on time.
     

  5. Duplicate NOC

    When you close your loan, the lender provides you with a No Objection Certificate (NOC). This certifies that you have paid all your debts and have no outstanding balances in your name. If you lose the original NOC and need a duplicate copy, your lender will charge you some nominal amount to reissue it.
     
Also Read: How to Finance a Used Car A quick guide
 

To conclude

 
Most financial institutions in India offer pre-owned car loans up to 80 percent of the vehicle’s value at attractive interest rates and a repayment tenure of up to 5 years. However, when financing a used car, borrowers should never overlook the charges on a used car loan. Knowing about the charges can help borrowers better plan their finances and avoid any penalties. 
 


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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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