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Financing types
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There are many standard vehicle loan types. Here are few:-
Margin Money Schemes
Security Deposit Schemes
Advance EMI Schemes
Leasing
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Margin money schemes
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This is the most straightforward scheme of them all. For
instance, if a car costs Rs. 1 lakh, a typical scheme would require you to pay
at least 10% up front, and you would get a loan of Rs. 90,000. The Loan to
Value (LTV) ratio is 90% in this case. The interest rate quoted will be on this
Rs. 90,000. Thus if the rate quoted is 16% for 12 installments, the EMI would
be Rs. 8,166. The interest rate is charged on a monthly basis.
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Security Deposit Schemes
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This is a variation of the Margin Money Scheme. In this, the company claims to
give a loan of 100%, but asks for, say, 10% of the amount in advance, which it
will return at the end of the loan period.
In effect, you are still getting a loan of 90%. But the reason that you are
being "shown" a lower rate is that the designer is making interest on your
deposit for the period of the loan, when your money is lying with him. He uses
that money to offset the amount that he is charging less from you. Some
security deposit schemes offer interest on the deposit that you pay. As long as
this rate is lower than the rate that you are paying in a normal margin money
scheme, the designer can reduce the price of the loan. Suppose you had to put
in a deposit of Rs. 10,000 in the above case, on which 14% is being offered.
The scheme lets you borrow Rs. 1 lakh, instead of only Rs. 90,000. In effect,
he is borrowing the additional Rs. 10,000 from you at 14%, and is lending you
that same money at 16%. So he's making extra money, which he can afford to use
to reduce the 16%. Thus, he is using your own money to give you a lower rate.
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EMI and Hire Purchase
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EMI and Hire Purchase are the same, the only difference being that under Hire
Purchase, the size of the installment was known to the hirer and interest was
calculated in loan balances.
Under the modern EMI, a much smaller amount is adjusted against the installment
in repayment of the principal and much higher against interest liability. But
the hirer does not know the adjustment and the lifetime cost and is happier to
pay a fixed sum, an affordable EMI for the period committed.
In both the cases, the vehicle is in the vehicle owner's possession, but the
legal ownership rests with the financier. Under hire- purchase, it is
automatically transferred to the buyer as soon as the last installment is paid,
while under lease, a separate transaction of buying the lease expired car has
to be made. Depreciation is available to the buyer under hire purchase and to
the financier under lease.
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Leasing
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Leasing is another form of financing vehicles. The buyer pays a fully tax
deductible fixed monthly rental - there is no need to segregate monthly
installment and interest and there is no security deposit.
Decide on your vehicle, and go for it. There is nothing to think of, except, of
course, paying those installments on time!
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