Skip to main content

Personal Finance: Keep Your Car Loan in manageable limits

With rising rates and higher prices, it's wiser to save more to lower the loan amount before buying your dream car


    YOUR dream car just got costlier in 2011, thanks to rising interest rates. But should you postpone the decision to buy a new car? Not if you have been saving up for 2-3 years. It is definitely not the best option to bank highly on a car loan. Ensure you cough up at least 30% of the cost of the car even if banks insist only on 15% of the cost as margin money.


Never Go Overboard: Car loans are bad because the value of the car depreciates faster than the principal amount. You should set their financial goals much in advance and plan properly to achieve them. Give priority to your needs over wants. You should always consider safety features, maintenance cost and fuel efficiency but should not pay extra for luxury if you cannot afford it. That doesn't mean you should not take a loan. But keep the loan amount as low as possible and fund the purchase out of your savings.


    It is not only the EMI which will affect your monthly budget but also the cost of fuel and regular maintenance of the car. So ensure that the EMI does not exceed around 25% of your monthly income/salary. The loan amount should be decided on the basis of your affordability to pay the EMIs and not just by what banks offer. Sometimes people opt for a long-term loan of 5 to 7 years to lower their EMI burden. But they should understand that they pay more interest if the term of the loan is longer. You should consider a three year loan tenure instead of five years, if possible. Don't stretch to seven years. Also, avoid taking a loan for down-payment.


    The average loan-to-value ratios quoted by banks tend to be in the range of 80-85% of the ex-showroom cost of the car. That implies you have to pay up to 15% of the car value out of your own pocket. However, percentages could vary, depending on the vehicle segment.


Don't Expect Standard Interest Rates: Banks quote only rack rates. But the actual interest could be much lower, depending upon subventions and other dealer discounts. The bank specifies the rack rate on which it will propose to lend. The dealer has the option of ploughing back his commission, thereby reducing the interest burden for the customer. The decision of the extent of commission to be ploughed back rests with the dealer. Manufacturers also provide subventions, from time to time to ensure stock liquidation, and these may also be passed on to the customer to reduce his effective interest burden. However, the bank will continue to maintain its lending rate.


    The problem here is that auto loans always work on subventions, which vary from dealer to dealer. So, it becomes difficult for a borrower to scout for the cheapest rate in this scenario.


    Ideally, a borrower should fix the car model, know the price and fix the loan amount. Once a borrower knows the exact loan amount, he should approach the dealers who also act as DSAs for auto loans. Any customer should ask only for cash discount. Most dealers confuse the customers by saying they will offer a lower interest rate instead of a cash discount. But car buyers hardly know how to calculate the actual internal rate of return (IRR). Hence, if a borrower is paying . 1 lakh as the down payment for a . 5-lakh car loan, s/he should ask for a cash discount on that . 1 lakh. Then he should compare this discount offers by various lenders to identify the best deal


Go For A Fixed-Rate Loan: Fixed rates are more popular as they avoid any effect of cyclical changes. Also, these are more transparent. Since 2007, banks have started offering floating rates in car loans as interest rates increased by almost 1-2% in one year. Unlike home loans, banks offered car loans at a fixed rate for the entire tenure of the loan. Home loans also offer fixed rates but with a reset clause. As per that clause, the bank has the right to change the interest rate once every three or five years as stipulated in the home loan agreement. But car loans do not come with this clause. Moreover, unlike home loans, the difference between a fixed rate and floating rate is in the range of 0.5-1%. In India, borrowers have always faced the upside risk in floating rates. But they have never experienced the advantages of floating rate even when interest rates start falling. Hence, the difference of 0.5% doesn't pinch much. Clearly, the advantages of a fixed rate outnumber that of floating rate in car loans. In fact, borrowers can breathe easy by betting on a fixed rate in a rising interest rate regime,


Buy Your Own Insurance: Before making the final purchase, you will know the finer details of the car such as the model number, cost and other details. With these specifications, you can do some home-work on car insurance before sealing your purchase. Once you get the premium quotes, you will be able to compare them with insurance deals offered by dealers. There have been cases where customers have paid 30% lesser on car insurance premiums compared to those who have bought insurance from the dealer. Hence, a car buyer should make an informed decision. Moreover, if you are selling an old car which has some NCB from the insurer, you can get it transferred to the new car even if you switch to a different insurer. You have to submit the old insurance document which mentions the NCB (no-claim bonus) on that car. Then, the new insurer will cross-check with the old insurer to authenticate these details and do the needful.


    It is never a bad idea to buy a set of flashy wheels for you or your family. There is a certain percentage of income which should be ear-marked for luxuries and a lifestyle. But that shouldn't happen at the cost of savings or come with a huge bill that creates a dent in your personal finances. Plan, save and then splurge.


DRIVING LESSONS


Here are some of the things that you should keep in mind before buying your favourite car:

Ø      Fix the car model first, find out the price and then fix the loan amount

Ø      Borrow right. Your EMI should not exceed beyond 25% of your salary

Ø      An affordable EMI rather than a higher loan eligibility should be the deciding factor If possible take a three-year loan to save on the interest cost

Ø      Avoid taking a seven-year loan. It will be wiser to postpone your plans by a year and save up more

Ø      Instead of scouting for lower interest rates, ask for cash discounts from car dealers Buy your own insurance and narrow down your options before making the final purchase

Ø      Avoid prepaying the loan. Prepayment charges are as high as 5% of the amount prepaid

Popular posts from this blog

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now