Car finance - Make a smart deal

Car finance - Make a smart deal
	Over the last five years, the dream of owning a car has been coming true more and more easily for the country's burgeoning middle-class. Among the factors most responsible for this rapid motorisation is the availability of relatively attractive financing options. The change again has been made possible by the new-found alliance between the car-maker, the dealer and the financier. The fall in interest rates and the juggling of margins between the trio has enabled the car buyer to bargain for lower monthly repayments. The recently announced alliances by Maruti Udyog Ltd (MUL), the country's largest car manufacturer, with State Bank of India and its associate banks is another attempt at taking vehicle financing to the masses. The tie-ups also gel with the company's plans to increase its focus on the rural market, where the demand for Maruti's entry-level car could increase with the availability of cheaper financing
	Retail financing booms
	In the urban market, the steep rise in the number of passenger vehicles purchased through retail financing is a clear indicator of the increasingly easier availability and popular acceptance of this genre of car shopping. From a share of about 45 per cent of all cars sold five to six years back, to about 75 per cent now, car finance is the driving force behind the sales numbers that most automobile companies boast of today. In fact, of the remaining 25 per cent of car sales not funded through retail financing, a major chunk would be institutional sales and only a small portion outright purchases by individuals. Further, the falling interest rate regime and the increasing competition in the car finance segment have led to a substantial fall in the cost of funding a car purchase. From an effective cost (including processing fees, etc.) of about 24 per cent on a monthly reducing balance basis six years ago, rates have crashed to about 8-11 per cent now depending on the car model. If the current falling interest rate regime continues, the day may not be far when they match car financing rates in the US, where it is 4-6.5 per cent, on reducing balance basis.
	Getting a good deal
	So, with the myriad car financing options available, how do potential car buyers ensure that they get a good deal? What precautions are to be taken? What are the new models? And what are the tips to remember that will make that loan cheaper? First, the obvious start to the car purchase process is the selection of the car itself (which model and variant). The issue is dealt with in the accompanying article. After the car is selected, the next step is to calculate the amount of a car loan that needs to be taken based on the buyer's current savings kitty and his repayment potential. (See Table for EMI calculator and rates.) Among the banks and companies that are major players in retail car financing are ICICI Bank, HDFC Bank, State Bank of India, ABN Amro Bank, Kotak Mahindra Primus, Standard Chartered Bank, Sundaram Finance and Ford Credit. In addition to these financiers, car manufacturers also have preferred financing arrangements with certain banks and non-banking finance companies (NBFCs). For example, Maruti Finance has a preferred financing tie-up with nine other outfits, including Countrywide and Citicorp. Preferred financiers may offer more competitive interest rates than the others for specific models of the manufacturer with whom they have tie-ups.
	Newer options galore
	Until now, the plain-vanilla traditional retail financing option has been the only one available to buyers looking for a loan. Here, the buyer either pays an amount as margin money upfront and part-finances the car being purchased or, in some cases, takes a loan for the full amount payable for the car. The loan so taken is repaid over a fixed term at a pre-fixed interest rate, with the total outstanding, including interest charge, payable in equated monthly instalments (EMIs). Among the newer financing models that have come up are: Advance EMIs: Under this model, the buyer can take a loan for a longer duration and in many cases at a lower interest rate. However, this would be applicable and beneficial to customers who have the ability to pay a few EMIs in advance. This would effectively reduce the tenure of the loan and at the same time provide the benefit of a lower interest rate. This may be better than using the excess cash to pay upfront margin money, as the tenure and size of the loan in many cases determines the competitiveness of the interest rate offered. Security deposit model: A variation on this could also be the security deposit model, where the customer deposits his cash on hand in a fixed deposit with the financier, instead of paying it to the dealer as margin money. The fixed deposit will usually fetch a higher interest rate than a similar bank term deposit. But whether the deposit will offer a rate higher than the interest rate being charged for the car loan will depend on the model and the buyer's bargaining position. Maruti's Versa (above) and Hyundai's Santro Xing... Options for the upwardly mobile. Balloon payment: A newer model that is yet to gain widespread acceptance is the `End-of-term balloon' payment model. Under this model, the car buyer who is taking the loan gets to pay a lower EMI. This is either because the notional resale value of the car at the end of the loan term is not factored into the total loan amount or because a pre-fixed amount determined at the time of entering the loan agreement is expected to be paid at the end of term. In both the cases, the financier will reserve the right to retain the car if the contracted amount is not paid to complete the dues under the loan. As a result, in this model, the car buyer has to pay the balance `balloon' amount (in most cases the expected market/ resale value of the car) at the end of the loan tenure to get the vehicle transferred in his name. In comparison to traditional retail financing, the total interest paid out under the `balloon' payment model will invariably be higher. However, the `balloon' payment being due towards the end of the loan tenure allows for a smaller monthly instalment and so, is more pocket friendly especially for car buyers who are hoping to upgrade to a higher segment. For example, if the car costs Rs 4.5 lakh and the resale value at the end of a five-year tenure is expected to be Rs 2 lakh, the buyer can take a loan for Rs 2.5 lakh under the `balloon payment' scheme and opt to pay the balance (notional resale value) as a lumpsum at the end of the loan term. The balloon payment model has not caught on among most banks and NBFCs because of the inherent unpredictability of the used car market. However, with the used car market becoming more organised and with the entry of manufacturers themselves into this segment, there is a likelihood of the balloon payment becoming more popular. Lease and refinancing: A variation of the balloon payment model, which may also be introduced in the country after a further maturing of the car finance segment, is the retail lease financing of the car. Under the terms of the retail lease model, the car buyer has to pay the financier an EMI that consists of a monthly lease rent, finance charges and other charges, if any. At the end of the term, the car buyer has the option of paying the resale value and transferring ownership of the vehicle, or selling the vehicle and paying the financier's pre-assessed value of the car, or just paying a fixed charge for the financier to dispose of the vehicle. Refinancing has not gathered pace in the car finance market. Given the short tenures and steep default charges, it is unlikely to be introduced in the near future. However, under the balloon payment scheme and the lease option, finance companies and banks are more likely to come up with a refinancing option for the large end-of-term payment. SuperSavings tie-up: The other new financing model that is being tried by a few multinational banks and private sector banks is to tie a current account or a super-savings account to the loan account. Such tying up enables the car buyer to route any excess funds from the SB or current account to the loan account, thereby reducing the outstandings with the financier. Financing options abound. But apart from the basic financing models on offer, car buyers need to check out quite a few finer aspects of financing.
	Check these out too
	Apart from these financing options, the other points that need to be kept in mind by the potential car buyer are: A three-year loan term may be too short if the buyer's repayment capacity is not high. A seven-year term may be too long in the current falling interest rate scenario. In most cases, the five-year term loan will be ideal. Look out for hidden charges that may not be highlighted by the financier upfront, such as documentation charges, processing fees, etc. Interest rates and the EMI payable are always negotiable. Some banks also tailor the EMI according to the car buyer's repayment capacity. Most financiers have monthly targets to be met. As a result, they will be more willing to squeeze their margins and pass it on to the customer in the form of lower interest rates and EMIs towards the end of the month.