Car finance: Tread carefully


While on a hunt for a new car, Shyam Wagle called up a direct selling agent (DSA) of a private sector bank. The sales representative said he could avail of 100 per cent finance. The only amount Wagle would need to pay upfront was the first equated monthly instalment (EMI), he was told.


Later, Wagle found that finance for registration and insurance (the ex-showroom price) was not part of the deal. So, the loan amount came to 85-90 per cent of the vehicle’s cost. Also, the DSA gave him no option to choose the car’s colour. Every discount and offer for buying a car comes with a caveat. A buyer needs to evaluate each of those to know the final price. Here are a few of them:


Banks offer full finance to a select few only

The 100% loan has limitations

Check if the quoted rate is a flat rate or reducing balance

A monthly reducing balance loan works out cheaper than annual reducing balance

Meet different sales persons at the same time and ask them for a better deal

100% finance
This is possible, but banks reserve such schemes for a select few. Not everyone with a good track record can avail of this in its purest form. “Banks do finance 100 per cent ex-showroom cost. This depends on the customer’s profile, his relationship with the bank and the car model,” says Arvind Hali, head (retail assets) at Dhanlaxmi Bank.

For example, a person may have a large amount in fixed deposits with a bank, say Rs 20 lakh and plans to buy a car costing Rs 4 lakh. Some lender may offer him 100 per cent finance. Similarly, if someone in the top management of a reputed company wants to buy a car, financiers would offer 100 per cent. However, the bank will take one or two EMIs in advance, which is their earning.

Apart from the profile, banks will also look at the car manufacturer and the model. If their evaluation shows that the model has low defaults, banks could give 100 per cent finance. “This type of finance is usually for short-tenure loans (up to three years) only,” says Hali.

For a commoner to get the entire car cost financed, there are caveats. In most cases, as in the above example, the dealer and the DSA will ask the buyer to pay for registration and/or insurance. The dealer may not offer the usual freebies that other customers get. Dealers and DSAs also offer 1–1.5 per cent interest rate discount on card rates. “This benefit is withheld in many cases when a person opts for full finance,” says a certified financial planner.

Flat rates vs reducing balance
In another incident, Wagle went to a used car corporate dealer. When he enquired about the interest rates, the sales person told him that the dealer had a tie-up with two companies. One of the companies financed used cars at 16 per cent and the other at nine per cent.

When Wagle asked for EMIs, the monthly outgo for the nine per cent loan was higher. The company quoting the lower interest rate offered the loan at a flat rate. This meant the loan was not calculated on a reducing balance basis.

“Flat rate is not the real rate of interest that a bank charges a customer. It is just a marketing gimmick to attract borrowers,” says Kartik Jhaveri, a certified financial planner. Jhaveri uses an example to explain the difference: Let’s say a person borrows Rs 1 lakh for a year. The interest rate is 10 per cent on a reducing balance basis. The borrower will end up paying Rs 5,492 interest over one year. If the 10 per cent is a flat-rate loan, the borrower will have to shell out Rs 10,000 interest.

Getting the best deal
Experts said one strategy could be to call different DSAs and dealers to your home at the same time. “Make these representatives sit together. Ask them to work out the best deal they can give on car discounts, insurance and finance,” said a certified financial planner. This will make them compete against each other and offer you more benefits and lower prices.