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| Automobiles |
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| The
First Step |
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In the age of the 90's, with organized and institutional
auto finance into it's own, buying a vehicle
has become very easy. Their
services are being marketed aggressively
and imaginatively, loans sanctioned
quickly and formalities completed within
a day or two. In a recent research it was
found that 60% of car sales of Rs. 64 crore
billion were supported by auto loans of
Rs.40 Billion. By 2000, the demand
for auto loans is estimated to increase
to about 120 billion. It becomes a virtual dilemma for the
average loan seeker, when it comes to deciding on which
loan to take, on what terms, whether to go
to the bank or the financier, the marketing jargons,
the dealers to choose etc. In such a scenario, it would be much
better if you were a well -
informed customer. We hope this page will go a long way in
clearing those cobwebs that had you flummoxed. We explain
both sides of the story whether you decide to
take a loan or not. Taking a loan amounts to you
paying it back in installments till you pay off the
amount you have taken on loan. On the plus side,
loans offer you the chance of
buying a vehicle when you cannot afford to buy it upfront.
Financially too, it is a viable offer. Generally
the financiers offer 80% of
the total amount of the vehicle as loan. Keeping this
in mind, if a vehicle costs Rs. 2.25 lakh today, you
will receive a loan of Rs. 1.80 lakh. At the current
rate of interest at 16%, you will
have to repay Rs. 6,330 for
the next 36 months, Alternatively, saving
the same amount of money saved would get an interest
of 12% and it would be
30 months before you bought
the vehicle. By 30 months, your investment
amounts to roughly Rs. 2,20,000 which
will still be 80% of its value at that time, assuming its
price has shot up to Rs. 2.75 lakh by now.
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| Monthly
Rent System |
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On
deciding to take a loan, the first question that arises is
from whom will you take it? And On
what accounts will your decisions be based? The
usual, average loans are paid back with interest, in Equal
Monthly Installments or EMI as they are
popularly known. An EMI is a constant sum
of money that is paid monthly for a pre - specified
number of months. An EMI is divisible in
2 parts : Interest for one month on the principal amount which
is outstanding at the end of the previous month, and a further
repayment of the principal. For example, if you took a loan
of Rs.1 lakh repayable in twelve months at the rate of 16%
p.a., the EMI would be Rs 9,073.
In the first month, Rs. 1,333
of this would be interest
(being the interest on Rs. 1
lac @ 16% for one month),
and the remaining Rs. 7740 would
go towards principal repayment, thereby reducing the
principal to Rs. 92,260. So, for the second month, interest
will be Rs. 1,230 (being the interest on Rs.92,260 @ 16% for
one month), and the remaining Rs. 7,843 would
go towards principal repayment and so on. The loan may
be paid back by either the monthly
rests or annual rest method. In the monthly rest
system, the interest for each month is charged on
the principal left at the end of the last
month. An example would better explain
the annual rest method. Suppose you have taken a loan of Rs.
2 lakhs. In the first year, you have repaid 20,000 of
the principal. In the next year,
your interest will be calculated
on the remainder of the balance and
not the entire 2 lakh. Whatever amount you
will have paid during the course
of that year will only
be taken into account at the
end of that year, and not before.
Therefore, it is called the annual rest method.
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Loans
Schemes
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are four standard car loan versions : |
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| 1.
Margin money schemes:
This is the most straight forward scheme of them all. For
instance, if a car costs Rs. 1 lakh, a typical
scheme would require you to
pay at least 10% up front, and you would get a loan
of Rs. 90,000. The Loan to Value (LTV) ratio is 90%
in this case. The interest rate quoted
will be on this Rs. 90,000. Thus if the rate quoted
is 16% for 12 installments, the EMI
would be Rs. 8,166. The interest rate is charged on
a monthly basis.
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| 2.
Security Deposit Schemes:
This
is a variation of the Margin Money Scheme. In this, the company
claims to give a loan of 100%,
but asks for say 10% of the amount
in advance. It will return this amount at the
end of the loan period. In effect, you are still
getting a loan of 90%. But the reason that you are being
"shown" a lower rate is that the designer
is making interest on your deposit
for the period of the loan,
when your money is lying with him. He uses that
money to offset the amount that
he is charging less from you.
Some security deposit schemes
offer interest on the deposit that you pay. As long as
this rate is lower than the rate that you are paying in a
normal margin money scheme, the designer
can reduce the price of the loan. Suppose you had to put in
a deposit of Rs. 10,000 in the above case, on which 14% is
being offered. The scheme lets you borrow Rs. 1 lakh, instead
of only Rs. 90,000. In effect, he is borrowing the additional
Rs. 10,000 from you at 14%, and is lending you that same money
at 16%. So he's making extra money, which he can afford to
use to reduce the 16%. Thus, he is using your own money to
give you a lower rate.
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| 3.
Advance EMI Schemes:
This
is still another variation of the margin money scheme. The
bank offers to give the complete amount as loan but requires
you to pay some amount as EMIs in advance. It achieves two
things: You are giving a down payment, there-by reducing the
lending amount and the risk along with it. Also, the bank
stands to gain on the amount of interest that it gets. Firstly,
it does not give the 100% loan it had promised. Secondly,
the interest that it charges on the amount that it has lent
is in actuality greater. This is because, it calculates the
interest rate on what it has lent, but forgets about the sum
it has already taken in advance. Very simply put, if the bank
lent you Rs. 200 and collected Rs. 100 as advance EMI, it
will get its 16% on the Rs. 100 that it has actually lent
by telling you that it is lending to you at 8% on the Rs.
200 that you (ostensibly) borrowed.
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4. Processing Fees:
This
is the most innocuous-seeming (and popular) method. At the
beginning of the period, the bank requires you to pay 2%-4%
(typically) of the loan amount as "processing" fees. In effect,
the bank is lending you lesser than it had promised which
increases the effective rate that you are paying. For example,
if a bank lends you Rs. 1 lakh at 16% for one year (12 EMI's),
and charges you 3% as processing fees, you are in effect paying
an interest of 22%! Most schemes are a combination of these
base versions. A company might offer a loan at a price of
5.9% for a 12-month tenure, with four EMI's payable
in advance, and a processing
fee of 2%. The effective rate - a whopping 21.5%! and
you thought you were paying 5.9%!
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| 5. Hire
Purchase : |
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EMI
and Hire Purchase are the same, the only difference being
that under Hire Purchase, the size of the installment
was known to the hirer and
interest was calculated in loan balances. Under the modern
EMI, a much smaller amount is adjusted against the installment
in repayment of the principal and much higher against interest
liability. But the hirer does not know the adjustment and
the lifetime cost and is happier to pay a fixed sum, an affordable
EMI for the period committed. In both
the cases, the vehicle is in the vehicle
owner's possession but the legal ownership
rests with the financier. Under hire- purchase,
it is automatically transferred to the buyer as soon as the
last installment is paid, while under lease, a separate transaction
of buying the lease expired car has to be made. Depreciation
is available to the buyer under hire purchase and to the financier
under lease. Leasing is another form of financing vehicles.
The buyer pays a fully tax deductible fixed monthly rental
- there is no need to segregate
monthly installment and interest and there
is no security deposit. Decide on your vehicle, and
go for it. There is nothing to think of, except, of course,
paying those installments on time!
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