ATM :: An insight into car loans and car loan overdrafts

by | 10, March, 2014 |

Many car buyers who opt for borrowing think only of car loan option and are not aware of the other possible options like car overdrafts. Let us take a look at the intrinsic difference between a normal car loan and a car loan overdraft facility and analyse the pros and cons for both.

An Overview of Car Loan and Car Overdraft Loan:

Car loans are the most commonly used financial tools used by a majority of people to realize their dream car purchase. All public sector banks as well as private banks offer car loans for purchase of new and old cars. Car loans are quite simple to avail for new cars, as compared to used cars which have a number of preconditions and available on specific models alone.

For processing car loans, the borrower require to submit his income, bank statements and KYC documents with the bank and the bank processes the same depending on the amount of loan, the down payment and credit rating of the borrower.

Car overdraft loans on the other hand are car loans with an overdraft facility. In simple terms in this overdraft facility, the loan account is linked with an overdraft account, just like any other OD. While calculating the interest component, balances in the overdraft or OD account will be deducted from the principal outstanding on a daily basis.

Difference between Car Loan and Car Overdraft Loan:

Let us take the case of Manish who wants to buy a new car which costs Rs 7.5 Lakhs. Manish pays an amount of Rs 2 Lakhs as down payment for the same. In case if Manish opts for a normal car loan, he pays Rs 2 Lakhs as the down payment to the bank and gets a loan on the balance amount of Rs 5.5 Lakhs. If the rate of interest for the car loan charged by the bank is 11% per annum, and Manish takes a car loan for 7 years, he will have to pay an equated monthly installment of Rs 9416/-.

On the other hand if Manish opts for a car loan with an overdraft facility, he would end up paying a slightly higher equated monthly installment as interest rate for car loan with overdraft facility is usually 0.25% to 0.50% higher than normal car loan. In this case, Manish would be paying an interest rate of 11.25% for 7 years. This comes to an EMI of Rs. 9488/-.

Although Manish pays a slightly higher EMI in car loan with an overdraft facility, there is a catch. Firstly there are no prepayment charges in car loans with an overdraft facility. Car loan with an overdraft facility allows borrowers to pre pay any amount using their overdraft account. Secondly, the final interest rate would be charged only for the balance amount.

Suppose Manish completes paying Rs 4 Lakhs out of the Rs 5 Lakh loan amount after 4 years, through his overdraft account, he would be charged an interest on only the balance of Rs 1 Lakh and not the full amount of Rs 5 Lakh. Also Manish can use the funds in his overdraft account for any other financial needs.

The biggest advantage of car loan with overdraft facility is that the interest is calculated on the effective due amount and not the entire amount. The effective result is far lower repayment compared to a normal car loan. The amount placed in the overdraft loan account can be used as per the financial needs of the borrower. There is no cap on LTV and he can avail up to 100% of the value of the car, if he has the required eligibility in his OD account.

On the downside, car loan with overdraft facility is not available with all banks. Only certain specific banks have initiated such a facility for car loans. The second drawback is that such a car loan is usually made available for borrowers seeking more than a threshold limit fixed at Rs 7 Lakhs generally. So if you are seeking to buy a small car, a normal car loan may be the only available option.

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