Buying a car this Dhanteras? Check these 5 costs before signing the loan

With Dhanteras approaching, many people are considering bringing home a new car in the festival season. Discounts, exchange offers and easy financing options may make the purchase more affordable. However, borrowers should look beyond the interest rate before signing a car loan agreement.

While lenders often advertise competitive interest rates and low equated monthly instalments (EMIs), several additional charges can increase the overall cost of borrowing. Processing fees, documentation charges, insurance premiums and penalties for delayed payments can add to the financial burden.

For people planning to finance their purchase, understanding these costs is important to avoid surprises after the loan is disbursed.

"For most car buyers, the interest rate is the first, and often the only, number they compare. It matters, but it rarely reflects the full cost of borrowing. Fees, charges and loan terms can add meaningfully to what you repay," said Sumit Singla, chief executive officer, Rupyy, a digital lending platform.

Here are five costs borrowers should examine before taking a car loan.

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1. Processing and documentation charges

Processing fees are among the first additional costs borrowers encounter when applying for a car loan. Lenders generally charge a one-time fee for processing the application. This may be a fixed amount or a percentage of the loan amount.

Documentation charges and applicable goods and services tax may be levied separately.

For instance, if a borrower takes a car loan of Rs 10 lakh, even a processing fee of 1 per cent would mean an additional Rs 10,000, excluding applicable taxes and other charges.

Borrowers should ask lenders for a complete breakdown of these fees before accepting an offer.

“On a larger loan, these add up, so ask for the complete fee schedule upfront,” said Singla.

2. Prepayment and foreclosure charges

Borrowers who expect to receive an annual bonus, salary increase or other lump sum during the loan tenure may want to repay their car loan ahead of schedule.

However, they should first check whether the lender allows partial prepayment and whether any charges apply when the entire outstanding loan is repaid before the agreed tenure.

Foreclosure charges can reduce the savings borrowers expect from closing a loan early. The rules and applicable charges may vary across lenders and loan products.

“Planning to close the loan early with a bonus or windfall? Check whether part-prepayment is allowed and what applies on foreclosure. The flexibility to repay early can be worth more than a marginally lower rate,” said Singla.

Borrowers should therefore compare repayment flexibility alongside interest rates before choosing a lender.

3. Insurance and other add-ons included in the loan

While buying a car, borrowers may be offered motor insurance, extended warranties and loan protection covers. While some of these products can provide useful financial protection, buyers should understand whether they are optional or compulsory and whether their premiums are being added to the loan amount.

If insurance or other add-ons are financed through the loan, borrowers effectively pay interest on these costs as well.

For example, if a borrower finances an additional Rs 50,000 towards insurance and other products, the interest payable will also apply to this amount over the repayment period.

Amit Setia, chief business officer, Capri Loans Car Platform, said borrowers should check whether insurance is compulsory, whether it is arranged by the lender and whether its cost or other additional charges are included in the loan amount.

Borrowers should examine each add-on separately and avoid paying for products they do not need.

4. Late payment and cheque bounce charges

Missing an EMI can cost borrowers more than the instalment amount itself. Lenders may levy penal charges for delayed payments and additional charges if an auto-debit or cheque payment fails.

Repeated payment delays can also affect a borrower's credit score, potentially making future loans more expensive or difficult to obtain.

Before signing the agreement, borrowers should check the charges applicable to delayed payments and failed transactions.

These details are generally disclosed in the Key Facts Statement (KFS), which borrowers should read carefully rather than relying only on verbal explanations from the lender.

5. The actual cost of a longer loan tenure

A longer repayment period can make a car loan appear more affordable by reducing the monthly EMI. However, it also means borrowers pay interest for a longer period, increasing the total repayment amount.

For example, consider a Rs 10 lakh car loan at an assumed annual interest rate of 9 per cent.

A five-year tenure would result in a higher monthly EMI than a seven-year tenure. However, the borrower would pay less total interest over five years because the outstanding amount is repaid sooner.

Therefore, borrowers should compare the total amount payable across different repayment periods instead of choosing a loan only because its EMI fits their monthly budget.

What borrowers should check before signing

Setia advised borrowers to review the KFS, compare interest rates and examine the total amount payable for loans with similar repayment periods.

They should also understand the repayment conditions and charges applicable to late payments or early loan closure.

The KFS provides borrowers with information about the loan's important terms and charges, helping them understand the actual cost of borrowing before accepting the offer.

"Being aware of these details can help borrowers make informed decisions, manage their budgets and avoid unexpected costs," said Setia.

Ultimately, a car loan should be evaluated on the basis of its total cost, not merely its advertised interest rate. During the festive season, when discounts and financing offers can encourage buyers to make quick decisions, comparing lenders and reading the sanction letter carefully can help prevent an expensive borrowing mistake.