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A car is often the second biggest ticket purchase, after a house, in most Indian Middle-Class families. A Car purchase could add value to an Individual’s persona while affecting his Financial Planning in the medium and long term. It has a huge aspiration value and a regular maintenance cost.
A very large number of cars are purchased on Finance, sometimes extending up to 90% of the vehicle value.
Let us visit some of the important steps to be covered before buying a car on Finance:
First, do a full study of the quotation of the cost of intending car to purchase.
The on-road price of a car includes various elements to it :
Mandatory: Ex-Showroom Price/ Insurance/Road Tax
Additional: Accessories/Extended Warranty/Loyalty Programs.
Today, a lot of Companies offer finance covering both the Mandatory and Additional costs incurred.
Finance can be arranged from :
Finance wing of the Auto Majors: Example Sundaram Finance, Tata Motor Finance.
Banking Finance Companies: Example Nationalized and Private Banks.
Non-Banking Finance Companies: Private entities like India Bulls etc.
Local Financiers: they are often non-branded individuals or groups of persons who offer finance without documents but trust and ability of buyer even to those who don’t have banking habits and/or documents.
Groups: Chit funds and other group schemes.
A group of buyers are clubbed for a certain fixed period and financed, as an individual in the group by a Financier.
Each individual gets an opportunity to own the vehicle early/later, but surely, depending on the draw of lots. However, the EMI needs to be paid for the entire scheme period, without default, even after getting the vehicle. The Original Documents would be mortgaged with the Financier, till the dues are cleared. This arrangement is usually in rural areas.
Registered Non-Auto Finance providers: Like Muthoot Finance, Pawn Brokers, etc, wherein the buyer needs to pledge gold/silver/property documents, etc. The Original Documents would be with the Financier till the dues are cleared.
The Employer company could provide a loan to the employee. The Vehicle Cost would be paid, directly to the Dealer; and recovered from Employee as a standard salary deduction. In this case, some of the other perks and allowances could be affected/removed.
The preferred mode for many customers is through Banks and NBFCs. In the above case, the credibility of the buyer is ascertained through a mechanism called CIBIL Score.
CIBIL (Credit score): Credit Information Bureau (India) Limited, is a company that maintains all credit-related activities of individuals including credit card dues and all other loans from registered finance entities. A default will affect the buyer's CIBIL rating adversely.
A good Credit Score, say > 500, indicates that the Buyer enjoys a good reputation of repayment and helps the Financier in judging a customer's liability and repayment ability. Most Finance entities depend on CIBIL score before approving the Finance. It is advisable for the buyers to regularly check on their CIBIL score before applying for finance.
The thumb rule for the Finance amount sanctioned is: EMI should not be more than 1/3 of the net income – after all the deductions are provided for. In case the net income is lower, the buyer can add the income of his/her spouse for getting the loan sanction.
Now that the Finance eligibility and Finance Amount to be taken has been concluded, it is time to decide on the type and tenure of the financier. Car Loans, usually extend from 1 year to 7 years. The elements include Principal Finance Amount, Processing Fees, Interest Rate, Pre-closure Charges.
Taking finance from an entity, who has financed you earlier would involve lesser complications, generally. Usually, the Nationalized Banks have lower interest rates compared to the other Finance entities. The Processing Fees, Pre-closure Charges could be either low or, in any case, waived off. NBFC’s have an interest rate that is usually a little higher, and there could be processing charges and Pre Closure charges too.
However, the documentation in the case of NBFC’s is often less tedious. And the Finance conditions could be more flexible too. All the pros and cons need to be studied for Net Outflow before concluding the Finance.
There are often different rates for different individual segments. For example, Senior Citizens and Women are often offered a slightly lower rate of interest.
Knowing the perceived Market reputation of the Car Brand, and its resale value is also another factor that could decide the availability of Finance options.
A Car that commands a good Brand Perception is easier to get financed.
Always ensure that the hypothecation is done with the Financier while procuring Finance, and the hypothecation is removed, when the Finance is cleared.
And finally, do not take loans that will burden you unreasonably and cause a default. A default will affect your CIBIL adversely, and affect your credibility.