Use your car as collateral

Both a top-up and loan against your car are available at rates marginally lower than personal loans.

Need cash urgently? Put your car to good use by availing a loan against it, as Deepali Trivedi is planning to do with her seven-year old car. What surprised Trivedi was that she hadn’t ever been the bank’s customer.

It’s not widely advertised, but a few banks and non-banking finance companies (NBFCs) provide loans against used cars. HDFC Bank offers this product, called loan against cars. Kotak Mahindra’s car financing arm, Kotak Mahindra Prime, offers top-up loans to existing car finance customers.

According to K V S Manian, group head (retail liabilities and branch banking), Kotak Mahindra Bank, such loans benefit both customers and lenders. Says he, “Banks find it cheaper to source business from customers whose credit profile they are already comfortable with. Customers find the rate of interest cheaper than that of a personal loan.”

DISBURSALS
While Kotak Mahindra Prime’s rate of interest is 11–14 per cent, depending on the loan amount and repayment history, HDFC Bank offers it on a 16 per cent reducing balance. According to Ashok Khanna, senior executive vice president & business head, vehicle loans, HDFC Bank, these loans are comparable to personal loans. Personal loans are unsecured loans and most banks charge over 16 per cent for such loans.

New customers may be offered up to 85 per cent of the car’s value. But the valuation per se is dependent on the bank. It depends on variables like the car’s age, condition and the depreciation value that increases with age, to arrive at the current value. No wonder, independent experts advise against taking it for very old cars. “The value of the loan, in case of a loan against a car, will be restricted to the value of the vehicle. The older the car, the lesser value it would generate for you,” warns Harsh Roongta, CEO, apnapaisa.com.

In case of a top-up loan, the amount disbursed is related to how much of the ongoing loan has been repaid by the customer. While Kotak Mahindra Prime offers higher top-up amounts if the number of equated monthly instalments paid is high, HDFC Bank deducts the amount due on existing car loan customers and then disburses the new loan. So, it works like a refinanced loan would.

RESTRICTIONS ON SALE
Since banks treat the credit facility against the car like any other securitised loan, one needs to hypothecate. The lien is marked on the customer’s certificate of registration (the RC book), an important documentary proof of ownership, at the regional transport office (RTO). This would restrict sale of the car until the hypothecation is removed. One needs to obtain a no-objection certificate from the bank and give it to the RTO before proceeding to do so.

So, a person availing a top-up loan in the fifth year of his existing car finance loan will have to wait for an additional three years before he can sell his car. Three years is the maximum term for such top-ups. It would work best if you avail of the top-up while still in the early part of the car finance loan.

OPTIONS
For those looking for quick cash, there are options. However, the rates for loans against property (12-15 per cent) and shares up to Rs 10 lakh (11–16 per cent) may be approximately the same that you need to pay for the loan against your car.

But, as certified financial planner Suresh Sadagopan points out, “The borrower’s credit history is not an important factor when opting for loan against gold, blue chip shares and property, since the collaterals have higher value.”