When is the best time to apply for a bank loan for the purchase of a car? Here are some tips you should keep in mind.
Should you take out a bank loan to buy a car? There are many sides to this question and many opinions. Ultimately, however, the decision is up to you, based on your own priorities, future goals, and current financial situation. Experts recommend that you avoid a situation where your car loan eats up 30-40% of your net monthly salary or income. This will leave you with little breathing room to take out other large loans or sudden credit, while leaving less room for savings at the same time.
At the same time, in an ideal scenario, the car loan should be no more than 10-15% of your total net income. It should ideally not exceed 20% even if you are eligible. However, there’s a silver lining here – with an increase in income, your take-home pay will increase, making the car loan amount a smaller part of your monthly salary, giving you more room for savings and investments. First calculate your mandatory expenses like your monthly rent or home loan, food, electricity. Thereafter, keep at least 10-12% of your income for investments in asset appreciation and growth and other avenues. Thereafter, what you have on hand is your true loan respite.
In this case, you can plan the purchase of a car by allocating this part of your monthly income to the reimbursement of EMIs. However, you will also need to plan for the down payment. You won’t get a 100% car loan and even if you do, that in turn will only result in high interest and exponentially higher monthly EMIs. Therefore, try to pay the recommended minimum of 15-20% of the car’s value as a down payment. You should only apply for a car loan when you have saved that money and without hampering your other savings, emergency fund, etc. Cars depreciate assets whose resale value will be considerably lower than the prices paid to acquire them. You should therefore invest something in appreciating assets in order to build up a reserve while also paying off the car loan.
Many people think that you should always buy a car with cash in order to avoid paying interest. It is a philosophy that many follow. However, for higher priced cars, many believe this is avoidable because cars depreciate assets and it doesn’t make sense to lock a large sum of money into something that will earn you no return. Therefore, it is best to invest excess capital in investment avenues and other assets that will provide you with returns and accumulate over time while managing an auto loan with regular monthly cash flows as per this school of thought. Consider things very carefully before applying for your car loan.
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