A quick drive through your car loan

Mumbai: Cupid can strike at the unlikeliest of places.

The first time he saw her was at a bus stop, standing in a queue, waiting for a bus. He was three spots behind her. There was something about her he liked, but he couldn’t place it. Maybe it was her overall demeanour.

And so started the daily ritual. She would look at him and smile. And he would smile back. No words were exchanged.

Till a day came when he bought a car and was driving to work. At the bus stop, he saw her standing in the queue. He stopped the car and asked her, “Can I give you a lift? Guess we are going the same way.” She quietly got into the car.

And then the first words were said.

“New car?” she said.

“Yeah. Just bought it a couple of days ago,” he said.

“On loan?” she said.

“Yes. The total cost came to Rs 5 lakh. I paid Rs 1 lakh from my own savings. For the rest, I took a loan,” he said.

“Ok. If I may ask, how much interest are you paying on it?” she said.

“See, I am paying an equated monthly instalment (EMI) of around Rs 14,000 for a period of 36 months on a loan of Rs 4 lakh. So the interest comes to 16% per year. You know I didn’t fall for the flat rate of interest thing that these car loan agents like to push,” he said.

“Smart. But you should have shopped around. You must have taken a loan from a new generation private sector bank. Most public sector banks finance car loans at much lower rates.

The interest rates they charge on new cars vary between 11% and 13%. At an interest rate of 12%, your EMI would have come to a much lower Rs 13,300. Over a period of 36 months you would have paid around Rs 25,000 lesser.

More India business stories

The only problem with public sector banks is that they ask for a greater margin amount. Margin amount as you would know is the amount you bring to the table. In your case you paid around Rs 1 lakh of the total cost of Rs 5 lakh. That means you paid a margin of 20%. Most public sector banks ask for a margin of 10-20%. So you would have easily fit into their scheme of things,” she said.

“Hmmm. I didn’t know that. When I buy my next car I will keep that in mind,” he said.

“Yup. So when did you pay your first EMI? My guess is at the time of taking the loan,” she said.

“Yeah. They deducted the first EMI while giving me the loan. Also there were processing and documentation charges that amounted to another Rs 3,000, which meant I got a loan of only Rs 3.83 lakh. Guess that is the way things work,” he said.

“Ideally, your EMI should have started one month after you took the loan. So what this means is that they have given you loan of Rs 3.83 lakh and you are paying an EMI on a loan of Rs 4 lakh. So your effective rate of interest is 21% and not the 16% you have been told,” she said.

“Smart. But I am not planning to keep paying EMIs for 36 months. I will make some part prepayments on the loan,” he said.

“Part prepayment? Forget it. Part prepayments are not allowed in case of most car loans,” she said.

“Not allowed? But no one told me that,” he said.

“Ever heard of Caveat Emptor or buyer beware. It’s not their job to tell you, but it’s your job to know. It must be a part of the contract you signed,” she said.

“What if I want to make a full prepayment? Can I do that?” he said.

“Yes, you can do that. But pay a prepayment charge. The prepayment charge in case of most new generation private sector banks is around 4-5% of the amount outstanding. In case of public sector banks it is around 2%. So if decide to prepay at a time when your loan outstanding is Rs 3 lakh you would have to pay a prepayment charge of Rs 15,000 (5% of Rs 3 lakh).

Nevertheless, even with the prepayment charge it makes sense to prepay. If you were to do a fixed deposit of that amount you would get a maximum of 6% after tax returns. If you use that amount to prepay, you lose the 6% you would have got otherwise. But at the same time you would be not paying the 21% that you are paying on the loan,” she said.

“But tell me something. How do you know so much?” he said.

“Well, my husband sells car loans for a living,” she said, smiled, opened the door and stepped out.

Under license from www.3dsyndication.com

SEARCH