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Are you planning to buy a car? Do 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.
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Find out how much
loan you can really take
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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.
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Look beyond the interest
factor
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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).
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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.
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Find out if the Bank is
offering a step-up option
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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.
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Processing Fees
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Take into account the processing fees, which usually
range between 1% to 3 %, while making the decision to take a loan.
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Read the fine print
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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.
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Find out about the pre-payment
charges
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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.
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Find out your risk appetite
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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.
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Check the depreciation
factor.
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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.
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When do you pay the monthly
installment
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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.
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Look for longer duration
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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.
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Thumb rule is :
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A good car market encourages banks to give longer tenure
of loans.
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Do I want the loan?
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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.
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Let’s do some number crunching
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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 principal 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.
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Watch out for the Deposit
schemes
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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.
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