Car Loan in India 2026 - Types, EMI, Eligibility & Documents

Cars represent a significant financial investment for many individuals. However, not everyone can afford to buy a car outright, making car loans a popular option. A car loan allows you to purchase a vehicle by borrowing money from a bank or financial institution, which you then repay over a set period. This guide covers all the essential information you need to know about car loans, from eligibility and interest rates to benefits and tips for making the right decision.

• A car loan is a secured loan provided by a bank or financial institution, specifically for purchasing a vehicle.

• In most cases, the car itself acts as collateral, meaning that if you default on payments, the lender can repossess the vehicle to recover losses.

• Many dealerships offer in-house financing, making it convenient to arrange for a car loan at the time of purchase.

• Dealership loans can sometimes have competitive interest rates, especially if the dealership has promotional offers or relationships with financial institutions.

Car loans in India primarily fall into categories based on the vehicle's condition and purpose, such as new cars, used cars, and specialised vehicles. Lenders offer these loans at competitive interest rates, typically ranging from 7.60% to 10% p.a., with tenures up to 7-10 years.

• New Car Loans: These help you finance the purchase of a brand-new vehicle from a showroom,  covering up to 80-100% of the on-road price

• Used Car Loans: Designed for pre-owned vehicles, these provide up to 75-90% financing, but with higher interest rates and shorter tenures

• Loan Against Car: You can use an existing car as collateral for your financial needs; this is different from purchase financing

If you’re planning to get a car loan, follow these steps to simplify the process and improve your chances of getting the best rate:

1. Choose Your Car Model and Price Range

   • Determine the make, model, and price of the car you want, as this will directly impact the loan amount you require.

2. Check Your Credit Score

   • Your credit score significantly affects your eligibility for a car loan and the interest rate you’ll receive. A higher score typically results in better loan terms.

3. Research and Compare Lenders

   • Shop around to compare interest rates, fees, and loan terms from various banks and financial institutions to find the best deal.

4. Submit Your Loan Application

   • Once you choose a lender, submit your application along with necessary documents such as proof of income, identity, and address.

5. Loan Disbursement

   • Upon approval, the lender disburses the loan amount directly to the car dealer, allowing you to finalise your purchase.

There are 3 key stages in the loan process, and once you complete them all error-free, you can give yourself the best chance to get approved. 

Preparation:

• Maintain a credit score above 750 for the most pocket-friendly interest rate 

• Use an EMI calculator to select a loan amount within 40-50% of your income

• Plan a 20%+ down payment to minimise the lender’s risk and get an affordable loan 

• Gather documents like Aadhaar, PAN, salary slips, and bank statements beforehand

Application:

• Apply online via bank apps or reputed third-party digital lenders for faster processing 

• Consent to video verification and set up an appointment 

• Upload all needed documents at once for faster approval

Post-Approval Actions:

• Complete the video KYC

• Avoid multiple applications to prevent score drops

• Stay in touch with the bank manager/loan executive

To qualify for a car loan, you typically need to meet specific criteria:

• Age

You must be between 18 and 65 years old.

• Residency

Applicants must be residents of India.

• Income Threshold

Lenders usually have minimum income requirements to determine your loan eligibility and repayment capacity.

• Required Documentation

Also Read : Car Loan Tax Benefits And How To Claim It

The interest rate on a car loan is the fee charged by the lender for borrowing money. It can vary based on multiple factors, including:

• Vehicle Type

New car loans generally have lower interest rates than used car loans, as new cars retain more value as collateral.

• Credit Score

A high credit score may qualify you for lower interest rates, as it indicates a lower risk for the lender.

• Income and Financial Profile

Higher income and a stable financial background can improve your chances of obtaining a favourable interest rate.

An EMI (Equated Monthly Instalment) calculator is a valuable tool that helps you estimate your monthly payments based on the loan amount, interest rate, and tenure. Using an EMI calculator can help you:

• Plan Your Budget

By knowing your EMI, you can better manage your monthly expenses and ensure that the loan payment fits within your budget.

• Compare Car Options

If you’re undecided on a car model, an EMI calculator allows you to evaluate the affordability of each car based on monthly instalments and make your choice.

• Prevent Over-borrowing

Calculating your EMI beforehand prevents you from taking on more debt than you can afford, helping you avoid financial strain.

• Manage Financial Plans Effectively

With an accurate EMI calculation, you can align your other financial goals, such as savings and investments, with your loan repayment plan.

• Avoid Surprises

By knowing your monthly obligation in advance, you’re better prepared for the financial commitment, reducing the likelihood of missing payments.

The loan amount you’re eligible for depends on several factors, including:

• Loan-to-Value Ratio

Most lenders offer up to 85% of the car’s value as a loan, though this can vary based on the lender and your financial profile.

• Income and EMI Limit

A common recommendation is to keep car loan EMIs within 20% of your monthly income. For instance, if your monthly income is Rs. 40,000, your car loan EMI should ideally not exceed Rs. 8,000.

• Vehicle Type

Newer models and cars with safety features (e.g., airbags, ABS brakes) can increase loan eligibility, as they retain higher value.

• Credit History

A solid credit history may not only help you get a higher loan amount but can also lower your interest rate, reducing the cost of borrowing.

A car loan offers a practical solution for purchasing a vehicle without the need to pay the full amount upfront. However, it’s essential to conduct thorough research before committing to a loan. Each lender provides different interest rates and terms, so comparing options helps you secure the most competitive rate available. Additionally, calculating your monthly EMI using an EMI calculator is crucial to ensure the loan remains affordable and aligns with your financial goals. By assessing both lender options and monthly payment obligations, you can make an informed decision that fits comfortably within your budget.

Yes, many banks offer loans for used cars, although the interest rates and terms may differ from those for new cars.

Some banks may offer discounts on car loans if you have an existing loan with them and a strong repayment history, as this demonstrates your creditworthiness.

Yes, if you have a high credit score and strong financial profile, you may be able to negotiate a lower interest rate with the lender.

These documents are typically required from all applicants:

• Identity Proof: PAN card, Aadhaar card, passport, voter ID, driving license

• Address Proof: Aadhaar card, passport, driving license, voter ID, latest utility bill, registered rent agreement

• Financial/Banking: Bank statements for the last 3 to 6 months

• Duly Filled Loan Application Form

• Latest Passport-Sized Photograph(s)

• Vehicle-Related: Proforma invoice or quotation from the car dealer

Yes, you can get car loans with low credit scores in India, though approval becomes challenging if your score is below 700. Certain NBFCs or small finance banks may accept scores as low as 600-650.

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