Car Finance: Driving The Best Bargain

Financing your dream-on-wheels has suddenly become more expensive. The reason: the foreign banks and non-banking finance companies (NBFCs) have hiked interest rates on their car loan schemes.

Last month, Standard Chartered, Citibank and ANZ Grindlays hiked their car finance rates which were hovering between 17-18 per cent to 20.5 per cent. NBFCs such as Kotak Ford Credit followed suit and hiked lending rates by three to four per cent, from between 16 per cent to 18 per cent to around 20.5 per cent. And Countrywide Finance has hiked rates by two to three per cent.

This is a sharp U-turn after the last two years. As new models drove onto Indian roads they were followed by a number of new car finance schemes. But gradually the volumes in the business started slipping. One industry source says they dropped by over 30 per cent in 1997. This resulted in the regular slashing of interest rates to generate demand.

 

So the sudden hike in rates may come as a shock for those who had put the brakes on buying and were waiting for car finance rates to drop further. One Standard Chartered official explains, The hike was inevitable because of the rise in borrowing rates in the market. Sandeep Singh, marketing officer, Apple Finance agrees: The main reason for the hiked interest rates is the hike in the prime lending rate (PLR). Cautions the helpful Stanchart official, There will be attraction gimmicks on and off during the year to help boost sales, but expecting a fall in interest rates is useless.

At first look, the interest rates charged by NBFCS and foreign banks may seem more or less the same. However, it is worth looking at the figures more closely. If the NBFCs indicate flat rates which seem absurdly low, first translate these figures into annual rates to know what you would pay in real terms. For instance, you can purchase a Maruti car from Sundaram Car Finance paying as little as 11.3 per cent interest on a three-year loan repayment tenure. Similarly, a luxury car would come for 12.3 per cent only.

Read the fine print and the picture changes slightly. You will find that this flat rate amounts to 20 per cent on an annual reducing balance rate. Rajgopalan of Sundaram Finance explains, We are offering a better rate than most of our competitors who offer loans at rates that amount to 21 per cent.

Lloyds Finance charges 21 per cent on the loans for the popular Maruti car, but its lending rate for luxury cars such as the Cielo is cheaper and ranges from between 19.5 per cent and 20.5 per cent. Says Ben, a Lloyds marketing official, We can afford to give lower rates for luxury cars since we get certain benefits from car manufacturers. So if its a luxury car you are aiming for, you would do well to watch out for such margins offered by finance companies.

Nevertheless, dont forget that the NBFCs still offer the most flexible and custom-made options. But even Citibank and Bank of America reduce their rates for credit card holders or accountholders. Citibank for instance cuts the rate by one per cent if you are a Citibank Gold Card member or a Citibank Preferred Card member. Others like Stanchart maintain the same rate for everyone.

So what is the best option for a would-be buyer? Indian banks are still the cheapest bet. They charge between 17 per cent and 18 per cent on a reducing balance as compared to 20 per cent or more by the foreign banks and NBFCs.

However, Indian banks still need to iron out some of their schemes. Bank of India, for instance, is ready to sponsor up to 75 per cent of the value of the car at 17.5-18 per cent, but only if you are a professional and work for a priority sector, preferably doctors or engineers. Other Indian banks offer finance to all employed or self-employed individuals but they lose points for the amount of time they take to process papers and give the final nod.

By contrast, the NBFCs can get you behind the wheel with the least possible delay. Foreign banks like Citibank and Stanchart take about five days to process your requests. Some, like Stanchart, will even send a salesman home. Needless to say, you pay for the personalised service by way of steeper processing charges. So if you take a car loan from SBI, you pay a processing charge of one per cent of the loan amount, irrespective of which model you buy. Citibank, on the other hand, varies its charges based on the category of the car: Rs 6,000 for standard cars and Rs 8,000 for luxury cars.

A lot depends on what car you plan to buy. If you are happy to stay with the rugged Ambassador or the Premier most financiers will finance only up to 60-65 per cent of the cost. The reason: resale values for these cars are very low.

In fact, Apple Finance doesnt usually give loans for Ambassadors, Premiers or Mahindra jeeps. The all-time favourite of finance houses is the Maruti and you can get up to 90 per cent of the cost of this car as loan. Nationalised banks like SBI and Bank of India sponsor only up to 75 per cent of the value of the cars.

It is important to remember that the public sector banks allow you to repay the principal without penalties. Foreign banks like Citibank and Stanchart have an extra charge of two to three per cent on the outstanding principal. Also, remember that you cant pre-pay before six months of the loan tenure even if you have spare cash. BankAm varies this slightly and will allow you to repay 25 per cent of the principal amount. But if you pre-pay more, the bank will charge about four per cent on the amount over 25 per cent.

The NBFCs also discourage pre-payments: Apple Finance levies a flat four per cent charge on the outstanding amount when you prepay. Similarly, Kotak has penalty charges depending on your loan tenure and the amount of EMIs you have already repaid.

If you can only afford a second-hand car, be very sure before venturing into the schemes. Most banks and NBFCs are not big players in this business. Some will make an exception and finance second hand cars for chosen customers and at slightly higher rates of interest because of the risk involved. Punjab National Bank offers only up to Rs 1 lakh for the deal and will charge about 19 per cent. That is one per cent more than it charges for new cars.

Also be wary of fly-by-night operators who offer soft loans. Delhi reportedly has a number of dealers offering instant car finance and easy instalment schemes for second-hand cars. But these are aimed at tax evaders since it needs no paper work and payments are strictly in cash.

Second-hand car financing has a long way to go in this country. So most buyers will be forced into the new car market. But dont forget the first rule: always read the fine print.