Do you know what a hire-purchase agreement on a loan is? Do you know what a 'hypothecation' agreement is?
Do you know how these two work and what their pros and cons are?
If you are buying a car on loan, is it desirable to use your credit card to make the down payment?
In a chat with Get Ahead readers on June 19, personal finance expert Harsh Roongta answered these and several other queries related to car loans.
For those of you who missed the chat, here is the transcript.
Part I: Taking a car loan? What you need to know
Part II: Why an overdraft loan is better than installment loan
Aakalp asked, Dear Harsh, What is this Maruti Finance? Do I get benefited in any way by availing finance through them?
Harsh Roongta answers, Maruti Finance is a brand owned by Maruti. They have tied up with various banks for providing loans for purchasing cars from the Maruti stable.
guru gulab khatri asked, Hi Harsh, is it possible to buy a car in Gurgaon at ex-showroom price + insurance price and get it registered at Thane?
Harsh Roongta answers, Interesting question. Probably there could be a VAT implication. Will need to have it examined before I can answer.
superb asked, Harsh could you please tell me if loan on phone is a good option from ICICI Bank? I have heard they don't offer good rates on such deals. They are not asking for any income documents also. So is it the right way to go for a car loan?
Harsh Roongta answers, What is the harm in keeping it as one of the options to be considered as long as you also explore other options? You can follow the seven steps to negotiate a great car loan deal mentioned here: http://www.apnaloan.com/articles/car-loan-india/car_loan_best_rates.html.
WagonR asked, Hi, for home loans, sometimes people get a cheaper rate from bank X and pre-close their previous loan from bank Y. Is there a possibilty like this for Car loans?
Harsh Roongta answers, This normally does not work too well for car loans due to the following facts:
~ The tenure is short, so the benefit of a falling rate is not very high.
~ The prepayment penalty payable is much higher.
~ The normal interest rate payable is distorted by the discounts built in the interest rates and hence the fall in rate may not be as high as you think. Having said that, there is technically nothing stopping that from happening though it is rather rare.
tarun_tv1 asked, Sir, myself working with an MNC wishes to buy a car. If I take a loan of Rs 2 lakhs on Alto, then which would be the best scheme to take and can I able to claim any depreciation in the current financial year and how much? Regards - Tarun Verma.
Harsh Roongta answers, Tarun, as a salaried person you will not get any tax benefits at all from the car purchase.
ritwik asked, Hi Harsh, what is the difference between Hire-Purchase agreement and Hypothecation?
Harsh Roongta answers, In a hire-purchase agreement (which is not very popular nowadays as it may have VAT implications), the car is owned by the lender and is given on hire to the user. On payment of all the installments (which are to be treated as rent), the user can buy the vehicle on payment of a pre-fixed purchase price.
Hypothecation, on the other hand, is a regular loan where the vehicle is provided as a security (or 'hypothecated' in legalese) for the loan.
SathishVM asked, Hi Harsh, noticed some points in your reply in an earlier chat that contradicted my experience.
1. Personal loan rate of interest for employees of reputed companies is much less than car loan rate. And there is zero processing charge too. When at IBM, I got a personal loan for 11 per cent on reducing balance, which is 6.4 per cent simple interest flat. While car loans were 12 per cent that time and came with processing charges as well.
2. Not advisable to swipe credit card for downpayment. Car is not an asset and is definitely not a good financial practice to incur a 35 per cent interest credit for downpayment! If someone can't have means to do a 20 per cent cash downpayment, s/he does not deserve to lavishly spend on a car!
3. For cars that cost more than Rs 8 lakhs or so, it's best if the employer offers it as a benefit so that the EMIs can be tax-exempted. Else the rapid depreciation on such cars and the interest outgo on 4-5 year loans make it a bad purchase.
Harsh Roongta answers, Apnaloan definitely does not recommend swiping your credit card for the down payment. We definitely agree it is an expensive option and should be avoided as much as possible. On personal loans being cheaper than car loans, it goes against all economic logic that a secured loan is more expensive than an unsecured loan. Whilst yours might have been a stray case, it definitely is not true for 99.99 per cent of the consumers.
askrajat asked, Hi Harsh, State Bank of Trvancore (part of SBI) provides car loans with tenure upto 7 years. No partial prepayment penalty. Shall I go for it?
Harsh Roongta answers, Yes, by all means, go for it.
Harsh Roongta says, Ok folks. It was great chatting with all of you. I think most questions would have been answered in some way or the other. Please do read the transcript. Looking forward to meeting you at the next chat session.
Part I: Taking a car loan? What you need to know
Part II: Why an overdraft loan is better than installment loan