Jash Dharod, who works for a private-sector company, plans to buy a new car for his family in Mumbai, where they all live. As he has no immediate commitments, he plans to take a loan for the purchase.
Volkswagen’s finance arm is offering a loan at 5.99 per cent, but that is only for two models: Polo and Vento. Should Dharod go just by these low rates? No, say experts. He should check if the car meets all his requirements like mileage and budget. If not, he should take an auto loan from a bank and buy one suited to his needs.
Car companies may offer lower interest rates, but only for some models. Says Banwari Lal Sharma, assistant vice-president (marketing) at car comparison website, CarWale: “Car finance companies usually offer lucrative rates on car models which haven’t done well. Therefore, the lower rates may be just a ploy to sell their unsold inventory.”
Since most auto dealers have tie-ups with one or more lender, the best option for borrowers would be to choose between the lowest rate among those.
On an average, public sector banks offer loans for up to 13 per cent, as against private banks which charge up to 17 per cent on a loan of Rs 5 lakh. Financial arms of car companies like Tata Motors Finance, Hyundai Finance and Mahindra Finance also offer loans in the range of 12 to 14 per cent. Lenders offer both fixed and floating rates and the period usually varies between three and five years.
If not lower rates, then why would a loan from a car finance company make sense? It would if the loan is disbursed faster with minimum paper work. Abdul Majeed, partner & leader (automotive practice), PricewaterhouseCoopers, says car finance companies are typically launched so that they can offer convenience to their potential customers. “In case of loans from such companies, documentation is often much lesser than a bank loan,” he says. “Add to that, loan disbursal is also faster.”
Recently, Toyota launched its finance arm Kirloskar Motor, where it offered facilities like easy documentation, eight-hour loan approval and insurance funding. At the same time, even if banks may take slightly longer to sanction the loan, borrowers with a good record and credit score are always allowed negotiation for lower rates. Also, banks can allow relatively longer repayment periods based on your relationship with your bank, as compared to car finance companies. For instance, many a time, banks can extend loan repayment periods for long-term customers by a couple of years. This would indirectly reduce the monthly burden on you.
Another advantage of borrowing from a bank is that, for a good customer banks do reduce processing charges and at times even waive these, says Kunal Khattar, vice-president at Carnation Auto.
While purchasing a car, if there is an option, always insist on a cash discount. Your dealer may try to lure you with freebies like accessories, or a lower interest rates. In comparison, if you get a lower rate of interest from the bank, that may not be for long as it will change with any change in interest rate cycle. For instance, your car dealer offers you a price discount of Rs 50,000 on an Rs 8 lakh car. This means your car will now cost you Rs 50,000 less and, hence, the loan amount and the consequent repayment will also ultimately be lower.