How to get the best auto loan on offer
With various lenders giving auto loans, do a thorough comparison of features, and bargain for the best rates
Ford Credit India, the financing arm of car manufacturer Ford India Pvt. Ltd, recently started car financing for retail investors. The trend of car makers providing loans to customers who buy their vehicles is not new. Tata Motors Ltd, Volkswagen India Pvt. Ltd and Toyota Kirloskar Motor Pvt. Ltd, among others, have been giving such loans through their auto finance arms. But do they give better loans than what banks or non-banking financial companies (NBFCs) have to offer? Which is the better avenue to take an auto loan from?
There are four ways in which you can take an auto loan. One is a bank of your choice. The second is through the finance arm of a car maker, known as captive lender. The third would be an NBFC and the fourth is a bank and car maker tie-up.
In comparison
“The advantage with captive lenders is that they have the ability to tailor interest rates and offer subvention schemes to make the interest rates more attractive than by other lenders,” said Rajiv Raj, co-founder and director, CreditVidya, which provides credit guidance. A subvention scheme is where the lender offers the interest for a fixed period.
For instance, Ford Credit India is offering loans at interest of 7.99% on Ford EcoSport and Ford Figo Aspire. The annual percentage return (APR) (this is the actual interest rate paid on a loan as it includes the cost of obtaining that loan) would be 8.8%, which is much lower than what most banks offer for their auto loans. For example, the minimum APR for car loans offered by State Bank of India (SBI) is 9.85% and at ICICI Bank it is 10.75%, according to the banks’ websites.
The processing fee charged by captive lenders is also usually lower. For instance, Volkswagen Finance charges 3,000-4,500 for its car loans as processing fees while Axis Bank charges 4,000-6,000 and HDFC Bank 3,000-6,000, according to the lenders’ websites.
Other offers are also available, including finance for maintenance cost and zero downpayment. For instance, BMW Financial Services, the finance arm of BMW, has rolled out an offer called the 360 degree program which gives assured buyback value of 57% after three years and a zero maintenance package (where the car owner does not have to pay for maintenance for a fixed number of years) along with 5.99% interest rate, for its BMW3 Series, according to the car maker’s website.
However, the disadvantage is that low interest rates offered by captive lenders are available only for vehicles of that company and only on select models that the manufacturer may want to push.
Apart from that, the loan tenures are generally shorter. It is usually five years versus the seven years that most banks offer. This is where state-owned banks score higher.
Public sector banks offer better terms for prepayment, processing and foreclosure charges. At present, most such banks have waived off processing fees till 31 December 2015 as a festival season offer. Even otherwise, some of them, such as SBI and Union Bank of India, have no prepayment and foreclosure charges, as per banks’ websites. So, you can prepay or foreclose the loan any time without having to pay a penalty for it.
This may not be the case with most private sector banks. For instance, to foreclose your auto loan by HDFC Bank, you need to wait for at least six months from the time of taking the loan, and there is a foreclosure charge of 6% of the principal outstanding if the loan is closed within a year according to details on the bank’s website.
In fact, some private sector banks, including ICICI Bank, do not allow part prepayment at all.
Most private sector banks offer a fixed rate of interest on auto loans. This is because the Reserve Bank of India (RBI) does not allow a bank to charge fees for part-payment or foreclosure on floating rate loans.
Even the number of part-payments that a borrower can do is limited. For example, Axis Bank allows part-payments only twice a year while with HDFC Bank it is twice during the whole loan tenure, according to the respective bank’s websites.
There are also restrictions on the amount of part-payment.
In terms of funding limits, too, while private sector banks, car makers and NBFCs offer 100% financing, it is usually for a few selected brands and models.
How to get the best deals
Look for special promotions or offers. While car manufacturers have offers for some of their specific models, public sector banks have schemes such as offering lower interest rates for women borrowers.
For instance, Punjab National Bank provides interest discounts of up to 0.35% to women customers. SBI has a scheme in which it reimburses finance for cars purchased using your own funds at the rate of interest applicable to new car financing (if your car is not more than three months old).
Many private sector banks, too, offer interest discount of 0.5-1%.
Whichever financier you choose, negotiate hard on the loan terms. This includes interest rate, tenure, processing fees and foreclosure charges. “Credit profile of customers becomes an important tool for negotiation on interest rates,” said Raj. So, if you have a healthy score, do remember to use it to get a better loan.
“Unless they ask, customers may not get any relaxation in terms,” said Adhil Shetty, chief executive officer and co-founder, BankBazaar.com.
The piece of information that most people use to choose a loan is interest rate.
Therefore, keep in mind that the loan type and repayment method also determine the interest rate.
“Decide whether you want an unsecured car loan with floating rate of interest or a secured, fixed rate loan,” said Shetty. Fixed rates would, of course, be higher than floating rates.
There are three repayment methods, apart from paying regular equated monthly instalments (EMIs). One is step up EMI (instalments increase every year). Another is step down EMI (instalments decrease every year) and third is, balloon EMIs (a large lump sum has to be paid towards the end of the loan).
Base your choice of repayment method also on how you would like to use the car. For instance, those who like to change cars often could choose the balloon EMI option. Under this method, up to 25% of the principal could be paid at the end of the tenure.
“A balloon loan is a good option as it keeps your monthly payments low. This is only if you know you will have the money to pay it by the end of the loan tenure,” said Shetty.
What should you do?
“The best way to maximise negotiable amount is to arrange the financing before going to the dealership. Since a dealer works on a commission basis, she may try to sell at a higher-than-necessary interest rate,” said Shetty.
Check if the car manufacturer has any special offers running for the model that you want. Make sure you understand the special interest rates because it may be that the offer is valid only for a certain period of the loan, say, two or three years.
If no special interest rates are available, then check if the car maker has any tie-ups with banks or NBFCs. Ask for a quote on the interest rates. “The borrower can then compare the best offerings and negotiate,” said Raj.
You could negotiate with your bank to see if it can offer a better rate. Bargain to bring down or waive processing fee and prepayment charges. Do check for corporate discounts. And then make the final decision.
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First Published:19 Nov 2015, 07:02 PM IST
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