The Indian car market which is currently at 1.5 million units will double to 3 million in the next five years. In the 11 months to February, the passenger car market soared by more than 25% to reach 1,370,659 cars over the same period last year.
According to industry sources, almost 80% of cars in India are bought using a car loan. Moreover, with new models and companies in the Indian market, you are spoilt for choice—in terms of the car as well as the car loan. Here is a quick guide on how to shop for a car loan and some tips on getting the cheapest deal.
Also See How to take a car loan (Graphics)
Your neighbour’s car may look good in his parking space, but may not be the best for you. So, assess how much you can afford before deciding on a car.
When you walk into a car showroom, the dealer would offer you a loan through a pre-existing tie-up with a financier. Sometimes they even offer discounts and free accessories.
While it would save you some hassle to settle for the loan offered by the dealer, it would make sense to check out what other lenders are offering. Says Adhil Shetty, CEO, Bankbazaar.com: “Dealers usually get 1-2% commission on your loan, so it’s best to approach a loan portal or bank branch. It turns out cheaper.” However, if you do settle for the dealer’s loans, ask for cash discounts or free accessories such as a car stereo.
Sometimes banks offer pre-approved loans to existing customers. But in this case too, it makes sense to compare rates with other lenders. However, it is also true that the processing becomes simpler and quicker in a pre-approved loan.
Also, at times you can negotiate with your bank to give you a better rate on a pre-approved loan. In fact, you can also use the pre-approved loan offer to negotiate with other banks. If you have a pre-existing relationship with the bank in terms of a loan, banks may give you a car loan at concessional rates. For instance, recently Union Bank of India launched a scheme wherein it is giving its existing home loan customers a 50 basis points (bps) concession in interest rates on car loans.
Model, loan term can lower rates
Surf a bit and you will find various sites, such as www.carsalesindia.com and www.indiacar.com, displaying car prices and dealers. Narrow down to a few options. Remember that the interest rates differ for different car models even if the loan is taken from the same bank. So that, too, can impact your overall budget.
Also, the duration of the loan would affect the total interest you pay on the loan. Factor these in when choosing a car. For instance, ICICI Bank Ltd offers an interest rate of 9-13% on a loan with a term of up to 35 months, 9-12.75% for a term of 36 months and 9-13%, between 37 and 60 months. HDFC Bank Ltd charges an interest rate of 7.50-15.50% depending on the tenor/segment of the vehicle. On the other hand, rates for cars in the small, medium and large categories is 10.25-10.75% and those in the premium or high-end category is 9.50-9.75%.
Go for fixed rate loan
Some banks give you the option of fixed and floating rates. “It’s always better to go for the fixed rate option,” says Amar Pandit, CEO, My Financial Advisor, a financial planning firm. Though the floating rate is generally around 50 bps lower than a fixed rate, the prepayment charge for auto loans can be as high as 5%. So the chances of you actually benefiting from any general decrease in rates is not high. In fact, you continue to run the risk of paying more if the interest rates increase.
Pandit adds: “Consider floating rates only if the gap is of 200-300 basis points. As of now, rates are expected to rise, so fixing the rate makes more sense.”
Month-end is a good time
End of any month is the time when the pressure to meet targets increases. This gives you the opportunity to bargain and close a cheaper deal or get some discounts. Says an industry expert, who did not want to be named: “Bank employees have to meet month-end targets and may get frantic to close the deal. They may bend easily due to the target pressure and give better terms. Usually, this translates into waiver of the processing fee.”
High down payment, low interest payment
Don’t settle for the minimum down payment required. The higher your down payment, the lower will be your loan, which in turn would mean lower interest payment. Usually banks ask for a down payment of 15% of the total on-road price of the car.
Before settling for your favourite colour, consider a few things.
Some colours are popular compared with others. If you aren’t very particular about a certain colour, ask dealers for the not-so-popular colours and demand a discount. Vikran Rambhia, CEO, Hot Wheels Auto, a Mumbai-based car dealership, says, “Metallic colours are more expensive than non-metallic ones. One way to reduce cost is to choose non-metallic colours. In fact, non-metallic colours can be Rs8,000-10,000 cheaper.”
For instance, a non-metallic Maruti Wagon R LXI DUO BS III (with immobilizer) would cost you around Rs3.79 lakh, while its metallic version would cost you around Rs3.83 lakh, according to the company website. The difference comes to around Rs3,330.
Not to mention, choosing a slow-moving colour can get you faster delivery.
Then there are resale issues to consider. A car that gives you a better resale value will eventually decrease the cost of your next car.
Some car models and companies would fetch you 60-70% of their price, while others would get you less than 50%. Do find out which company or brand has the best resale value.
Check the fees
Don’t let interest rates be the only deciding criterion. Check the processing fees and prepayment charges across lenders. Ask for fee waivers and cash discounts when taking the loan.
Now that you have sealed the cheapest deal and got the car that you really need, get ready to zip.
Graphics by Yogesh Kumar / Mint
Shally Seth contributed to this story.