Top-up car loans can work out cheaper than personal loans

Opt for balloon schemes if you are capable of paying a large instalment upfront

In India, 80 per cent of car buyers avail of a loan to buy their dream car. The car loan market is growing at a rapid pace and the leading financial institutions are launching innovative and attractive schemes for the buyers.

Buyers have a variety of offers and repayment schemes to choose from depending on their needs. For elasticity in loan repayment, there are options such as the Tata Balloon Scheme, a bullet scheme. Then, there are external top-up options from HDFC or Tata Capital for those looking for money against their cars.

The balloon scheme
Tata Balloon Scheme is for customers who can periodically repay a larger instalment for their car loan. It allows customers to repay a fixed amount in two different formats 11- 1 and 1-11. For a loan tenure of one year, if the criterion is 11-1, a customer pays 11 smaller installments first and then one larger installment at the end of the year. This plan is especially beneficial for those who expect cash flows at the end of a certain period - for example, salaried employees who expect a bonus during a certain month. The other format allows customer to pay one large instalment followed by 11 smaller instalments.

Let's take an example to understand this. Thirty-year-old Karan Singh works in an IT company and has availed of a car loan of Rs 1 lakh. If he avails of a normal repayment scheme, he will pay a fixed equated monthly instalment (EMI) of Rs 8,840 for one year. On the other hand, if he avails of a balloon scheme using the first format, he will pay 11 smaller installments of Rs 7,553 and one larger instalment of Rs 23,800. In the second format, he will pay one larger instalment of Rs 22,800 followed by 11 smaller installments of Rs 7,500 each.

As can be seen from the table, the balloon scheme has two sides to it. Depending on the format chosen, either the borrower or the bank will benefit. If you pay the larger EMI first and the smaller later, the borrower stands to gain. If you pay the smaller EMIs first and the larger EMI towards the end, you will end up paying more interest compared to a normal loan scheme. So, borrowers wanting to avail of the Tata Balloon Scheme will do well to choose the 1-11 format.

The top-up option

Those who have taken a car loan but are not able to pay their next EMI, can avail of an external top- up loan from banks. They can get a loan against the financed car to get their engrossment brought to a close. So, the scheme has two benefits: foreclosure of your previous car loan and an additional loan at a rate (about 15 per cent) which is cheaper than a personal loan (17-18 per cent).

HDFC, for example, has a special scheme if you are looking for cash against your car. The bank will foreclose your running car loan and initiate it with the additional amount. HDFC will calculate your eligibility and provide you finance according to your eligibility. To avail this scheme, 18 EMIs of your car loan should be paid and your EMI track record should be clean. The formula to calculate the eligibility is:

EMI amount*tenure paid*multiplier (1.5) = loan amount
This will be your additional loan amount.

Let's take an example to understand this. Pankaj Rao has a running car loan of Rs 5 lakh from a bank 'X'. He has repaid Rs 3 lakh to the bank by paying 20 EMIs. Rao requires another Rs 2 lakh to close the loan. According to the eligibility criterion, he can get a top-up of Rs 4.5 lakh. After availing this top-up, HDFC will close his running loan by repaying remaining Rs 2 lakh and also provide him an additional Rs 4.5 lakh. Thus, Rao will become a customer of HDFC by availing a total loan amount of Rs 6.5 lakh. Though the process is a bit lengthier, the top-up scheme can help borrowers purchase their dream car as well as get an additional loan.

NBFCs are more lenient regarding top-up schemes. Tata Capital, for instance, is a recent entrant into the market. If you have not defaulted in paying 18 EMIs for your existing car loan, you can get a funding of 120 per cent against your car from Tata. If you have a clean track record of paying 12 EMIs, you become eligible to get 100 per cent funding.

Final word

By availing such options, one can enjoy a certain amount of flexibility during repayment. Borrowers should, however, acquaint themselves with different aspects of these schemes to ensure that they choose the right option and do not fall into a debt trap. For instance, if you are opting for 11-1 balloon scheme, be certain that you will be able to pay a larger lumpsum at the end of 11 months.

The writer is CEO, Dialabank