Are you planning to buy a car

Dream A Car &  EMI Related 

Are you planning to buy a car? Does the advertisements and brochures make you more confused. Help is on the way, as this article will brace you for the final talk. Here is a detailed guide to get that Perfect loan for you.

Find out how much loan  you can really take

Although some financiers have schemes that give 100% car financing, they will either take advance EMIs or a deposit from you. So you never really get what they promise you. And you don’t need to be a Noble laureate to understand that effectively you shell out some money from your pocket. So where does the question of 100% finance arise? Ask the supposedly shrewd marketers of loan products this question, if you see a point.

Look beyond the interest factor

Don't rush in to take a car loan just because interest rates offered on such loans are low. Effective interest rate would be a better parameter to judge a loan. It factors all the costs involved in a loan like processing fees and method of EMI calculation.

Avoid getting lured by lowly quoted "flat interest rates". Again calculate the effective rate of the scheme, which is on the basis of cash flows. The effective interest rate actually turns out to be higher on this method of calculation than the normal methods (Annual reducing balance, Monthly reducing balance etc).

The explanation to this is that principal doesn’t get adjusted (read reduced) with EMI payments unlike normal methods (Annual, Monthly reducing balance etc). So you end up paying more interest, besides the loan amount.

Find out if the Bank is offering a step-up option

This option is suitable for persons who can’t afford shelling out larger amounts as monthly payments initially. But, expect to pay higher amounts with a salary hike, promotions etc.

Take into account the processing fees, which usually range between 1% to 3 %, while making the decision to take a loan.

Read the fineprint

Find out in detail about the hypothecation of your vehicle to the financier, the loan agreement that you will have to sign, and the stamp charges that you will have to pay. Also try and get hold of a copy of the loan Agreement and read the fine print. Get a clear picture of what a loan agreement is all about.

Find out about the pre-payment charges

that are applicable on payment of loans ahead of schedule. This is useful as one would like to prepay some part of the loan as and when one gets money. This could translate into savings, as outstanding principal amount would stand reduced after such payments. These features help in your decision making during tie-breakers.

Find out your risk appetite

Are you the types who invest often in stock markets? Or you prefer the FDs? This self-analysis could be important if you are contemplating going for a security deposit scheme. As you would get no more than 12-15%p.a for the money you have deposited under this scheme. So here, there is an opportunity cost involved for not earning returns the stock market way if you are high risk taker.

Check the depreciation factor .

If you take financing in the form of loan or hire purchase you get to claim depreciation (You can claim these benefits only if you buy as a Sole Proprietor and not as an individual). If you lease the vehicle, the financier gets to claim the depreciation.Find out about the amortisation schedule to get a hang of the interest and principal contribution of EMIs at different points of time.

When do you pay the monthly installment

The timing of paying the installment is important as your salary might get credited at a later date than the date at which the payment has to be made. Then you have to provide a cushion by having a reasonable amount of money on your savings account.

Bargain and look for special discounts.

You can always negotiate the final rate of interest/EMI that you have to pay. Yes that’s possible. Also look out for some special benefits
For e.g. A existing credit cardholder of the same bank might give a 50 basis point cut in the interest rates on it’s loan product. Explore the possibilities of acquiring a product just to get discounts on car loans from that bank. For example by paying Rs 800 as annual fee for a credit card, you might become eligible for a 50 basis point cut. This could translate into substantial savings particularly on bigger loan amount.

Look for longer duration

if higher EMIs payments bother you. Go for a longer tenure loan. Usually car financing is available from 1 to 5 years. However there are some banks which have schemes which offer loans for 7 years. Hunt for them.
Generally, the tenure is dependent on the type of car you wish to purchase.

Thumb rule is :

A good second hand car market encourages banks to give longer tenure of loans.

Do I want the loan?

Well if you have all the money buy the car from your own funds, you shouldn`t be reading this section. But if you have idle money lying in your savings account, earning a paltry interest of 4.5%, try reducing your loan amount by that amount. If you cannot pay for the car but still dream of owning one, a loan will certainly help. And if you take it, the downside is that you have to pay your installments till the time the loan is repaid.

Lets do some number crunching

Generally you will get a loan value equivalent to 80% of the cars invoice price. So lets say if the car costs Rs. 2.5 lakhs, the amount of finance that you get is for Rs 2 lakhs. Assuming duration of the loan is 5 years and interest rate equal to 16%p.a. You will be shelling out Rs. 4842 under the monthly reducing balance method. Again under the flat rate of 16% p.a. the EMI works out to Rs (2,00,000 * .16 * 5 + 2,00,000) / 60 = Rs 6000. This is because the pricipal never gets adjusted in a flat rate basis of calculation. Morale of the story is basis of calculation is of utmost importance and work out the numbers yourself before going for a loan.

Watch out for the Deposit schemes

Some finance companies reduce the EMI and the interest rate under such type of schemes. Here the financier is effectively borrowing from you the amount equivalent to the deposit and lending the same to you .

The catch is he making money from this process, which he adjusts in the interest rates or EMIs. If he pays 12% interest on the deposit and charges you 17% on the loan, you end up paying 5% interest on your own money. It is better not to go for this scheme, and to use the deposit amount as a down payment and thereby reduce the total loan amount, interest outgo and EMI payments.