If you are planning to buy a car, you would find yourself in a fix. On the one hand there is the deterrent of high interest rates to contend with, but on the other there are attractive discounts and freebies calling out to you.
What can complicate matters for you in terms of a buying decision is the fact that there is expectation that interest rates will cool down in some months. Considering that car loans usually come at fixed rates of interest, would you want to fix yourself in a high interest loan to avail the discounts or wait for the rates to cool down at the cost of losing out on the freebies?
To find a viable answer for you we compared your total interest outgo with the discounts available in the market. Before that let’s take a look at what is on offer and why.
Slowing sales spur discounts
Festive season is here again and so are the discounts, as is the norm. But there is a difference this year: Discounts offered by most carmakers are higher than last year. Moreover, discounts have been around for some time now.
Slowing sales: The auto industry is in a slowdown phase in terms of sales. The industry’s growth is paltry this year as compared with last year, when it grew by an average of 30%. In May, it grew by just 6.54% year-on-year (y-o-y); in June, the figure was 1.50% y-o-y. In July, car sales fell by 16% as compared with the corresponding period last year. The downward trend continued in August with sales declining by close to 10% and a revival is unlikely in September.
The discounts came in early this year in May and June when usually the demand is low. But with festivities round the corner and sales plummeting to new lows, the discounts have now become more aggressive.
Says Vishnu Mathur, director general, Society of Indian Automobile Manufacturers, an independent industry association, “People stay away from buying during shradh, which is on this month. Some kind of turnaround can be seen in October.”
Discounts on offer: Most car makers are offering discounts in the range of Rs 20,000-40,000 compared with Rs 10,000-20,000 offered last year. The overall figure includes cash discounts, corporate discounts and freebies such as car accessories and others.
The quantum and nature of discounts varies among car makers. For instance, Volkswagen India is offering a discount up to Rs 40,000 in the form of freebies such as free insurance premium and waiver of annual maintenance charge. It is not offering any cash discount. “We are providing different kinds of packages from which a customer may choose. In some packages, there are combinations of free insurance cover and annual maintenance charges while in others, the effective rate of interest would work out to be around 7%. All packages provides a benefit of Rs 40,000,” says Neeraj Garg, director (sales), Volkswagen.
Market leader Maruti Suzuki India Ltd is offering discounts in the form of freebies in the range of Rs 10,000-25,000.
On the other hand, Hyundai India Ltd is offering cash discount, besides freebies. The company is providing discounts to the tune of Rs 20,000-30,000.
The interest rate scenario
If you add up the recent hike by the Reserve Bank of India, the policy rates have gone up 12 times since March 2010. And every time the central bank has hiked rates, banks’ lending rates have followed suit. Car loan rates are up at 12-14% as compared with 10-11% a year ago.
However, some banks have tied up with a few carmakers to offer attractive schemes. For instance, State Bank of India and HDFC Bank Ltd have lowered their margin requirements for Tata Motors Ltd’s Nano to Rs 15,000. If you take a loan from Punjab National Bank, you wouldn’t have to pay any margin money.
Which works out better?
So should you take advantage of the discounts or wait for interest rates to moderate? The answer lies in whether discounts are able to cover the extra money that you are paying due to high interest rates. But this would again depend on the quantum of discount.
In general, there is less discount on small cars; higher discounts are only for the mid and high-end segments.
Small cars: Let’s take a car worth Rs 3 lakh with a discount of Rs 10,000. So the effective price is Rs 2.9 lakh if you opt for the discount. Banks generally offer loans up to 80% of the price of the car. So on a loan of Rs 2.32 lakh (80% of Rs 2.9 lakh) at 13% over five years, the total cost of the car would notch up to Rs 3,74,680. Over a three-year tenor for the same amount and same interest rate, the total cost would be Rs 3,39,376.
However, if the rates were to moderate to 10.5% (which was the rate last year) six months later and there were no discounts to avail, the car would come at a price of Rs 3 lakh. Over the same tenor of five years, at 10.5% on an amount of Rs 2.4 lakh, your total cost of the car would come to Rs 3,69,480. Over a three-year tenor, the total cost would be Rs 3,40,800.
This means you stand to gain by Rs 5,200 over five years but lose by Rs 1,424 over three years with lower rates without the discounts compared with the present rates with a discount. However, if the discounts were higher, say Rs 20,000, you would gain over both the tenors if you buy the car now.
Mid segment: Now, let us take a car priced at, say, Rs 7 lakh with a discount of, say, Rs 40,000. So the effective price comes to Rs 6.6 lakh and the loan amount (80%) would be Rs 5.28 lakh. At an interest rate of 13% over five years, the total cost of the car would come to Rs 8,52,780. Over three years, the total cost is Rs 7,72,440.
However, if a loan is taken on 80% of Rs 7 lakh (Rs 5.60 lakh) at 10.5% over five years, the total cost would be Rs 8,62,160. Over three years, the total cost of the car would be Rs 7,95,236.
So you stand to gain by Rs 9,380 over five years, but over three years the gain is substantial at Rs 22,796 if you buy the car now. However, if the discount goes down to, say, Rs 10,000, you lose out over both the tenors in the high interest rates regime with discounts.
What you should do
Before buying car, you must compare the total cost of the car in the high interest rate regime, taking the discounts into account, with the total cost in a low interest rate regime when there are no discounts. Go for whichever works out cheaper for you. If there is a minor difference but you need the car in the near future, you may go ahead and buy the car now.