Now that you have finalised which dream bike you want to buy read How to choose a bike, you find out that you have to choose between either paying full amount of the motorcycle or not eat food for next 5 years. So naturally you opt for taking a loan.
You are buying a bike to go on a ride and don’t want to be taken on a ride by someone charging higher interest or binding you down in clauses that make no sense. This is why you should read this Guide about Two Wheeler loans.
Following points are covered in this article :
- Two wheeler loan process
- What is CIBIL & CIBIL score
- How Banks calculate Loan amount eligibility
- What is EMI and how is it calculated
- Two Wheeler loan EMI calculator
- Interest rates of banks & which bank is best for 2 wheeler loans
- Documents required for getting a motorcycle loan
- Cheat Sheet for getting a better deal
- Things to watch out for while getting a bike loan
- Jargon used by Banks for Motorcycle Loans
Two Wheeler Loan Process
For getting a bike loan, in most of the cases, you need to be minimum 21 years of age before you apply for a loan in your name. If you are younger, you may ask your parent to apply on your behalf.
After you submit the documents, the bank will check documents and decide if you are eligible for loan. Basically they want to make sure that you are able to repay the loan and if you can’t repay, they can catch hold of you for recovery.
These loans can be categorized either as Two wheeler loan OR as SECURED personal loans. Secured personal loans are different than unsecured loans. In two wheeler loan / secured personal loans, the bank hypothecation is registered on your bike at RTO.
It is NOT necessary to be an account holder in the bank from which you want to take a loan. Having good, existing relationship with the bank makes getting loan easier. But if you have good documentation, then you can approach any bank for getting a loan.
Loan amount depends on the basis of your income. eg. for Bank of India, 24 times of gross monthly emoluments in case of salaried employees/pension/ or two times of gross average annual income as per last 3 years I.T. Returns. For calculating your loan eligibility, bank will deduct any EMI currently being deducted from your gross monthly salary.
What is CIBIL & CIBIL score?
CIBIL is a credit information company having 2,400 members–(all leading banks, financial institutions, non-banking financial companies and housing finance companies). It collects data from all its members about loans given, repayment history of over 550 million individuals and businesses.
What CIBIL does is create a platform where any of its members can check credit history of nearly every person before providing a loan to him. Better the CIBIL score of that person, lesser risk to the bank and better interest rate to that person. CIBIL Score is a 3 digit numeric summary of your credit history that ranges from 300 to 900. The closer your score is to 900, the higher are the chances of your loan application getting approved.
You can check your CIBIL score at https://www.cibil.com/faq/free-cibil-score-and-report.
Don't go overboard in checking your CIBIL score every week. For every hit that is made to check your CIBIL score, it assumes that you are applying for a loan somewhere so repeated attempts to check CIBIL score actually downgrades it.
How much loan is eligible for my salary
It is easier to explain with an example. Let’s consider this scenario –
- Your monthly take home salary is Rs.25000/-.
- We will assume you do not have any other income.
- You need certain amount every month to survive (for food, stay etc). It is typically considered to be 30-40% of your take home salary. And
- You already are paying Rs.5000 EMI for some other loan
In this example, your loan eligibility will be calculated as-
So the bank will consider that you would be able to pay an EMI of Rs.10,000/month. Now the next step is calculating how much loan you are eligible for. It depends on the duration of loan. Longer the duration, lower the EMI. This is right time to introduce “Two wheeler loan EMI calculator”
What is EMI and how is it calculated?
EMI means Equated Monthly Payment. It is the amount you would pay to bank every month till your loan is repaid. The formula for calculating EMI is –
EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the loan amount (also called principal amount), R is the interest rate per month [if the interest rate per annum is 10%, then the rate of interest will be 10/(12 x 100)], and N is the number of monthly instalments.
Fear not, we have an easier alternative for non-geeks. Read on.
Which bank is best for bike loan? - Two wheeler Loan Interest Rates
Interest rates will vary from bank to bank. Even interest charged by Nationalised banks will vary depending on their current two wheeler loan portfolio exposure, priority sectors for banks etc. Thumb rule is Nationalised banks are the cheapest and Private Finance companies are the most expensive.
Here is a small table showing comparative interest rates of various banks :
|Interest Rate %||9.45||17.7||11.9||13.15||22.27||22.31||12.06|
|EMI/Lakh for 5 years||2098||2523||2219||2283||2777||2780||2227|
|Total Interest Paid in 5 years||25865||51383||33164||36980||66636||66773||33649|
|Total payment in 5 years||125865||151383||133164||136980||166636||166773||133649|
Rates mentioned are correct as of 25.7.2019.
Note: Loan Amount of 1 Lakh considered for above calculation.
Are you surprised to see the total different in amounts paid? Let’s consider Bank of India and State bank of India. Both are Nationalised banks. But you end up paying 25k more on a loan of just Rs.1.00Lakh. So be cautious and check interest rates of all possible banks before applying to any bank.
Here are links to few Bank websites where you can check latest interest rates :
CIBIL has also created a marketplace - an online platform where consumers get customized loan and credit card offers from multiple lenders (banks / finance companies) without applying individually to them. These offers are customized based on your CIBIL Score, income and other parameters. You can check the offers you are eligible for at https://www.cibil.com/faq/apply-for-a-loan.
Note: We do not get any commission / kickback from any of the financial institutions mentioned here. This article is in fact to help you in obtaining best deal in your motorcycle loan.
Misrepresentations / False Promises about interest rates
Please keep in mind that quoted interest rates and actually charged interest rates can be wildly different. It is plain & simple cheating simply because you don't bother to calculate the actual EMI. It is quite frequent (though illegal) practise to quote a fantastic interest rate and then quote EMI which has no relevance to the quoted interest rate.
Documents required for Two Wheeler Loan
Banks and other financial institutions require certain documents to process a loan application. While the list may vary depending on lender, a generally following documents are required by everyone.
1. Copy of 3 years Income Tax Returns (There needs to be minimum 6 month gap between filing dates of IT returns… This is to ensure that you don’t file IT returns just to obtain a loan)
3. Copy of Address Proof (Passport / ration card / landline bill)
4. Copy of Identity Proof (PAN card / driving licence)
5. Completed application form.
6. Six month’s bank statements (Salary account).
7. Employer offer letter + ID copy + last 4 months salary slips.
8. Proforma Invoice on Dealer’s letter head, stamped & signed.
9. Original receipt of the booking amount with dealer’s stamp & signature.
10. If you don’t have account in the bank then in most cases, you would need to open a new savings account. EMI will be deducted from this account.
11. In case if you don’t have long term relationship with the bank then they would also require a guarantor’s PAN card & Passport/Photo ID & bank account statements.
12. Banks may charge up to Rs.1500/- for processing the loan. For e.g. for stamp paper, franking etc.
Cheat Sheet for getting a better deal in Bike Finance
- Never be aggressive. Be polite, friendly while dealing.
- Bigger the loan amount, better deal you may get.
- Always submit documents in beginning of month, ask the bank to approve the loan and then don't accept it till around 20th of that month. Say that you are re-thinking, getting better deal etc. To achieve their monthly targets, the finance company guys would start offering better and better deal every alternate day. Each time he will say that this is the best he can do. Tell him what you wish for. If you get any offer near to what you wish for, go for it.
- Anyway, we don’t recommend private finance companies. They are aggressive while providing loans but miss one installment, then you are crapped upon by the whole universe.....late payment charges, interest, penal interest and what not.
- Always negotiate hard (politely) regarding processing fee and documentation fee. This is simply net profit for bank.
Bike Loans - Things you should watch out for
Always check pitfalls about prepayment charges, foreclosure charges, processing fee etc. A simple example is given below:
Please note that HDFC isn’t alone in levying such atrocious terms
- Max 3% processing Fee. So that if you get a loan of Rs.1.00L – you need to pay Rs.3000 to HDFC just to process the documents.
- Max 3% Documentation charges. So that if you get a loan of Rs.1.00L – you need to pay Rs.3000 more to HDFC as document charges.
- Overdue EMI interest – 2.50% per month (30% per year)
- If you want to pay EMI in a different format than what you decided earlier (ECS to cheque / Cheque to ECS) – Rs.500/-
- Cheque Bounce / EMI return – Rs.500
- Prepayment Charges(returning the loan earlier than the plan)
- Within 4 - 6 months from the 1st EMI – 10% of outstanding loan amount
- Within 7 months to 12 months from the 1st EMI - 6% of outstanding loan amount
- 13-24 months from 1st EMI - 5% of outstanding loan amount
- Post 24 months from 1st EMI - 3% of outstanding loan amount
Prepayment is not allowed within three months of EMI repayment. This basically means that that within 6 months from taking loan, even if you win a lottery, you can't close it. If you want to repay all the amount within a year, you will need to pay a penalty of Rs.6,000/- per Rs.1 Lakh outstanding loan. Simply because bank bothered to check your credentials, disbursed your loan and now doesn't want to let you get away.
No. This isn’t the complete list of charges. There are few more but we got tired of listing them.
So simplest way is to choose a bank that allows you prepayment without any additional charges, charges lowest interest rate.
Terms / Jargon used by Banks for Motorcycle Loans – decoded
- Margin Money – This is the amount that you will pay as your contribution of the loan. eg. If you are taking a loan for a bike costing 1 lakh, bank will ask you to pay …say 25%. This 25,000 is your margin money.
- Advance EMI - means the bank asks you to pay couple of EMI in advance. This also means that the actual loan disbursed is less than the sanctioned loan. This is used to inflate the processing fee and/or to make you feel that your sanctioned loan amount is higher than it actually is.
- Processing Fee – This is a clear crap idea of fleecing customers for no valid reason. Why should you pay someone any fee if you would also be paying interest on loan? Try to negotiate ZERO processing fee.
- Prepayment Charges – Why should a finance institution penalise you for paying back their loan? This is used in the hope of securing their returns for longer duration. Go for a loan only if you have an option of paying as much extra amount as you wish whenever you wish. It is your money and if you have surplus, why can’t you save interest?
- Flat Interest rate – Flat interest rate means the interest is charged on full loan amount irrespective of how much you have already paid. This was launched because companies wanted potential customers to feel as if they are getting bargain of the century. Would it not make sense if you were to pay interest only on amount you owe? Thumb rule is flat interest rate x 80% more normally works out to actual variable interest rate.
We hope, with this guide, you can grab a good deal from your bank. Happy Riding.
NOTE: We do not arrange any two wheeler loans. This guide is to help you negotiate better rates from banks / financial institutions.
So choose wisely and ride happily.
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