What is the difference between Car Loan and Car Overdraft Loan?
Car loans are a common financial tool used by people to realize their dream of a car purchase. For new cars, car loans require the borrower to submit various loan related 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 the overdraft facility, the loan account is linked with an overdraft account. The interest rate calculation varies for both loans. While calculating the interest component for a car overdraft loan any money parked in the overdraft or OD account is deducted from the principal outstanding on a daily basis thus reducing the interest rate. The final interest rate is charged only for the balance amount. 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 EMI compared to a normal car loan.
Is it a good idea to consider a higher down payment for car loan? Would the banks allow such a move?
Yes it is a very good idea to pay more than the minimum down payment for your car loan. In fact a lot of car loan borrowers commit the mistake of opting to pay only the minimum down payment. This makes the quantum of their loan higher and they end up paying a higher overall cost for the car. Paying a higher down payment than the minimum amount on the other hand makes sure your total loan amount is lower which leads to a lower interest payment each month and a reduced EMI. Banks will not lose anything and in fact gain since their car loans would be paid out quicker due to short quantum of loan. Also since the buyer is paying a higher down payment, the risk factor for the bank reduces making ti a win-win situation for both the bank and the borrower.
Car Loans are one of the best ways to fund your 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 well as used cars.
Car overdraft loans 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, the overdraft or OD account will be deducted from the principal outstanding on a daily basis.
The biggest advantage of a Car Loan with overdraft facility is that the interest is calculated on the effective due amount and not the entire amount. This effectively results in far lower repayments as 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 the LTV and the borrower can avail up to 100% of the value of the car, if he or she has the required eligibility in their OD account.
On the downside, a Car Loan with an overdraft facility is not available with all banks. Only certain banks offer 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, which is generally fixed at Rs. 7 lakhs.
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