Planning to buy a car this Diwali? Keep these points in mind while researching, comparing car financing schemes
New Delhi, September 21: Big ticket purchases are mostly done during festival time. This is because of the low lending lending rates on car loans and other offers like writing off processing fees provided by banks and non banking financing companies (NBFCs).
Not all spend so much time in knowing and comparing the car financing schemes. But, you need to consider these factors while choosing a finance scheme before purchasing a car this Diwali.
Financing through dealer
Without the buyer having to run around for a loan, the dealer would arrange the financing on its own. At the time of purchasing the car from showroom, dealers offer car loans to buyers as most car dealers have tie-ups with lenders.
Before choosing this option, keep this point in mind: Dealer might not have tie-ups with all banks.
Gaurav Gupta, CEO MyLoanCare.in (an online loans marketplace), said, “availing a car loan through the dealer is a slight convenience.” He added, “dealers tend to push the customer towards their captive finance arms or towards banks where they get higher commissions.”
“So, when a customer compares the offer from the dealer with more banks or at online marketplaces, they will typically find lower interest rates and better terms than those offered by the car dealer,” Gupta asserted.
Interest rate offered
It is also an important parameter. In two variations, lenders offer the interest rate. Those variations are ‘fixed or floating rate’ and ‘flat or reducing rate’.
Fixed or floating interest rate: In case of banks, both fixed and floating interest rates are linked to its marginal cost of funds based lending rate (MCLR). “Fixed rates are better for those who want certainty in interest payment. On the other hand, floating rates are better in case the rates are expected to come down in future. Typically, one bank offers only one type of rate,” says Gupta.
While most banks offer a standard rate to all borrowers, Bank of Baroda is the only lender offering rates based on the borrower’s CIBIL Bureau score (i.e., credit score) with the minimum cut off being 725.
Flat or reducing interest rate: While choosing between a flat and a reducing rate, one should not fall for the former merely because it is quoted at a lower rate. Gupta explains, “Some captive finance companies of car manufacturers, NBFCs and dealers quote flat rates at times. A flat rate of 5.64% is the same as reducing rate of 10% in terms of interest outgo for the customer. So, be careful not to compare flat rate with reducing rate.”
In the flat rate method, the interest rate is calculated on the full loan amount for the entire tenure, without taking into account the principal repayments done through equated monthly instalments (EMIs). In the reducing method, as principal gets paid each month, the interest is charged only on the outstanding principal amount.
Charges and fees
After interest rate, next important factor to look at are the charges and fees that are added to the loan.
Processing fees: Most lenders will ask for a processing fee as a percentage on the loan amount, which is typically about 0.5 percent plus taxes. In order to gain market share, some lenders may waive it too.
Documentation charges: In addition to the processing fees, lenders may ask borrowers to pay up a documentation charge which could be Rs. 300 to Rs 600 per loan basis.
Part prepayment and foreclosure charges: Making a part prepayment, in addition to the EMIs, towards the loan is something that lenders discourage. They, therefore, come with a prepayment penalty or a fee. Most lenders ask for a penalty of nearly 5 percent plus applicable taxes, of the prepayment amount or for foreclosing before the original term of the loan.
Some lenders may waive such charges on loans sanctioned especially during the festive season. Few may put conditions on prepayments and foreclosure by setting a minimum amount or an amount equal to one EMI and maximum amount at 25 percent of the outstanding principal in one year. So do read the terms and conditions carefully.
Loan on ex-showroom or on-road price
The ex-showroom price includes manufacturers’ cost, dealer margin, and the cost of transportation. For every make and model of car, this price may vary from city-to-city, but within the city it will largely be the same across different dealers. At times, dealers may give a discount on ex-showroom price. Lenders generally offer 95-100 percent financing of the ex-showroom price.
However, that’s not the only cost while buying a car and driving it out from the showroom. The car has to be registered with the transport office and you need to get it insured as well. The cost of registration, road tax, and insurance gets added up to the ex-showroom price and the resultant is known as on-road price. Most lenders finance up to 85 percent of this on-road price. The difference in loan-to-value ratios between the on-road and ex-showroom price could be 10 percent or more.
Choosing the right tenure is important
Generally, car loans have a repayment period of 12 to 84 months. And usually borrowers are tempted to choose a longer tenure since the EMIs are lower compared to a loan with a shorter tenure. However, do keep in mind that longer the period, higher is the total interest outgo.
So, on a Rs 5 lakh loan, you may end up paying Rs 1,86,000 as interest over 84 month tenure, while it will be about Rs 1,30,000 over 60 months tenure. You end up paying Rs 56,000 or 40% more as total interest.
If you are opting for financing from a dealer, make sure you read the terms and conditions before signing on the dotted line. Some lenders may offer part pre-payment facility only to salaried individuals and not professions and businessmen. And, if you intent to prepay the entire loan in few years, ensure there are no prepayment or foreclosure charges in the loan agreement.
(Inputs from agencies)