While festive offers can reduce costs, borrowers should also consider the lender's transparency and service quality.
Customers need to be mindful of their repayment capacity.
Footfall, enquiries, and bookings at car dealerships are rising, driven by attractive offers and promotions. These special deals typically start in October and run until the New Year.
"Many companies pay Diwali bonuses to employees, boosting purchasing power and consumer sentiment," says Raoul Kapoor, co-CEO, Andromeda Sales and Distribution, a loan distribution network.
Besides negotiating a good deal on the car, buyers must secure a favourable loan offer.
Festive offers
Many banks are offering lower interest rates and waiver of processing fees. Some have waived the foreclosure charge (see table).
The key question for customers is how much these offers should influence purchase decisions.
While festive offers may sweeten the deal, experts advise evaluating the overall loan terms.
"Beyond the perks, review the interest rate and loan tenure, and check for hidden fees," says Kapoor.
Interest rate
Compare interest rates offered by various lenders.
"Tailor-made schemes may offer significant repayment flexibility, with comfortable equated monthly instalments (EMIs). However, they will not compensate for a higher rate of interest," says Adhil Shetty, CEO, BankBazaar.com.
"Even if the loan tenure is two to three years, a higher interest rate can negate the benefits," Shetty adds.
Consider whether to opt for a fixed or floating-rate loan. Lenders may offer fixed-rate loans at lower interest rates with no prepayment charges.
"But the fixed rate will only be cheaper if interest rates remain stable or rise during the loan tenure. If rates fall, a fixed-rate loan could be more expensive," says Shetty.
Rates are more likely to fall in the near future.
Loan tenure
Lenders usually offer loan tenures of up to seven years.
"A longer tenure reduces EMIs but increases the total interest cost, and vice versa," says Sahil Arora, chief business officer (secured loans), Paisabazaar.
However, avoid EMIs that are too high. "Do not overstretch your budget," says Kapoor.
Shetty suggests striking a balance between the loan tenure (and hence the total interest cost) and the EMI.
Loan-to-value (LTV) ratio
This is the percentage of the vehicle's total cost the lender is willing to finance. The balance, known as the down payment, must be paid by the customer.
Younger customers often prefer higher LTVs due to difficulties in saving for a downpayment.
"Lenders set the LTV ratio primarily based on their credit risk policies and the loan applicant's credit profile," says Arora.
Kapoor recommends avoiding 100 per cent financing, as making a down payment reduces interest cost.
"A car is a depreciating asset, so keeping acquisition costs low is better. Only borrow what's necessary.
"If your funds are invested in instruments that offer returns much higher than the car loan rate, and you don't want to liquidate them, only then go for a higher loan," says Shetty.
Smart tips
While festive offers can reduce costs, borrowers should also consider the lender's transparency and service quality.
Customers need to be mindful of their repayment capacity.
"Most lenders prefer applicants whose sum total of EMIs remains within 50 to 60 per cent of their monthly income," says Arora.
Kapoor warns against rigid loan terms and unnecessary add-ons that inflate the loan amount. He adds that ignoring prepayment penalties and not reading the loan agreement are mistakes borrowers should avoid.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
