Planning to buy a car? Minimise tenure, maximise down payment on loan

Selling the old car independently, rather than going for an exchange offer, may fetch better value

Car dealerships across India are offering discounts ranging from Rs 25,000 to above Rs 1 lakh this festival season. The discounts are higher this year than they were in 2022. Here are a few useful tips for striking a good deal both on the car loan and car purchase.  
 

Compare loan offers

Compare loan offers from multiple lenders – both banks and non-banking financial companies (NBFCs). If you fail to do so, you could miss out on attractive deals.  
 

Says Adhil Shetty, chief executive officer, Bankbazaar: “Each lender may have different interest rates and loan terms, which can impact the overall cost of the loan significantly.”
 

For example, one lender may offer a lower interest rate but may have stricter terms for repayment, while another may have more flexible terms but may charge a higher rate. By shopping around, you can find the deal that suits your financial situation and creditworthiness. Says Shetty: “Besides getting a more favourable rate of interest, comparing loans will also enable you to negotiate with lenders for better terms, ultimately saving you money over the life of the loan.”
 

While going for one of the finance options available at the dealership is convenient, avoid them. Says Raoul Kapoor, co-chief executive officer, Andromeda Sales and Distribution: “They may not offer you the most favourable terms.” The interest rate could be higher since the lender pays a commission to the dealer.

 

How much down payment is ideal?
 

The down payment can be as low as 10 per cent of a car’s on-road price. But it is advisable to pay more. Says Kapoor: “While a low down payment plan may seem attractive, it results in higher EMIs and a larger overall interest payout.”
 

Suppose that the car costs Rs 10 lakh and you make a down payment of 10 per cent (Rs 1 lakh).
 

For a five-year tenure, the EMI will be Rs 18,249 and the interest amount will be Rs 1,94,925. But if you increase the down payment to 20 per cent (Rs 2 lakh), the EMI reduces to Rs 16,221 and the interest paid also comes down to Rs 1,73,267.
 

Minimise loan tenure
 

Car buyers often choose longer loan tenures, such as six or seven years, so that their EMI becomes more manageable. While this may make the car seem more affordable, it leads to higher overall interest cost. Says Shetty: “Opting for a shorter loan tenure, such as 36 or 48 months, may result in higher monthly payments, but it significantly reduces the total interest paid.”

He suggests choosing a loan tenure that strikes a balance between a manageable EMI and minimising the long-term interest cost. Remember that a car, unlike a house, is a depreciating asset whose acquisition cost should be minimised.
 

Exchange or sell the old car?
 

While the exchange offers available during the festival season provide convenience, they may not always yield the best value for the old vehicle. Hence, explore selling the old car independently for a better price.
 

Says Ravi Bhatia, president and director, JATO Dynamics, an automotive research firm: “Determine what’s the right price from companies like Cars24, Carwale, Spinny, and other used-car apps. Once you have got an estimate of its value, go to the dealer and ask them to match it. The dealer will also give you an offer. Compare all the offers and the benefits and then take a decision.”
 

Buy now or wait?
 

It is already November. If you wait for a couple of months, you will get a January registration. This will reduce the age of your car by one year and enhance its resale value.
 

Says Bhatia: “The signals from the original equipment manufacturers (OEMs) indicate that demand, while high, has been slightly less than anticipated this festival season. More offers could become available in the near future. For those who wish to decide based on financial considerations, it might be wiser to wait.” Finally, check the resale value of a model before purchasing it. Going for a car model with a good resale value will reduce the loan you have to take on your next purchase.