Maruti Suzuki, HDFC Bank’s flexible car EMI options come at a cost

Maruti Suzuki India Ltd, India’s largest carmaker, has partnered with HDFC Bank Ltd to offer flexible equated monthly instalment (EMI) options to new car buyers. The bank is offering three repayment options to borrowers who could be facing a cash crunch during the lockdown due to the covid-19 pandemic.

Of the three finance schemes, two focus on lower EMIs in the initial months. The first scheme combines step-up and balloon payment where the initial EMI is as low as ₹1,111 per lakh for a loan tenure of 84 months. The second option allows the borrowers to pay lower EMIs for the first six months (for salaried) or three months (for self-employed). In this case, the EMI starts at ₹899. The third is a flexi EMI scheme, where the borrower can choose low EMIs for three months every year for the tenor of loan.

Higher payout

The flexible repayment structures come with a cost. “They are similar to a moratorium a borrower avails on a loan. When there is no payment or lower payment for some months, the interest is added to the principal and interest is charged on it. Hence, the total outgo increases,” said Deepesh Raghaw, founder, PersonalFinancePlan, a Sebi-registered investment adviser.

In step-up loans, the one benefit that borrowers get is that they can avail of a higher loan amount. As the initial EMI is low, the eligibility for a higher loan amount increases. Borrowers pay lower EMIs in the initial years, and in the later years, the repayment is accelerated. Such loans, typically, assume that the income of the borrowers will rise in the future. But as they charge a lower EMI, the outgo in step-up home loans is also higher compared to regular loans.

Should you go for them?

The loan is targeted towards borrowers who are facing a crunch during the lockdown. Many employers have reduced the salary of their employees during the lockdown. Once normalcy returns, salaries are expected to get restored.

If you are certain that your income will be restored in some months, such loans may work for you. But not many have the certainty. On the contrary, there have been layoffs and there is still uncertainty on the impact of the lockdown on the businesses and economy. “In case there is uncertainty, borrowers should completely avoid taking any new liability,” said Raghaw.

If you are buying a new car, negotiate for a discount on the vehicle and finance separately. In many cases, if you negotiate them together, you won’t get the best deal. First, discuss the prices of the car. Talk about the loan later.