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| The
Base Rate |
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This is the rate of interest at which the financier is willing to
do business. For example, a financier may be willing to provide
car loans at a base rate of 10.5% to 11% per year. This rate is
generally fixed and cannot be negotiated. Most financiers operate
at similar base rates. However, financiers generally provide "interest
rate breaks" to the extent of 0.5% to 1% per year for customers
who have an existing relationship with them, a credit card issued
by them or an income level that is higher than their eligibility
requirement. Contrary to popular belief, reduction of a customer's
car loan interest rate is achieved as a result of financial contributions
provided by other players such as the manufacturers, dealers or
sales agents, and not the financier except for the "interest
rate breaks". |
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| Car
manufacturers' subvention |
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Car manufacturers give a financial incentive to a select few
car finance firms to push sales of their cars. This makes
some of the larger car financiers more competitive than the
smaller players who are not eligible to receive manufacturers'
subvention. For example, a financier may receive Rs.6000 from
Maruti Udyog for every Esteem car loan booked by him. Generally,
the financier will build this incentive amount received from
the manufacturer into the pricing of the car loan.
Let's
look at an example to explain this |
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| Dealer
discount |
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Different dealers hold different levels of stock. A dealer
holding higher stocks may be willing to part with a higher
discount. Dealers also receive incentives for target achievements
from the manufacturers in addition to the mark-up that they
have on the sale price of the car. A dealer who is likely
to receive a substantial incentive by selling a certain volume
of cars in a given month may be willing to part with a much
higher level of discount than another dealer who is unlikely
to receive any incentive. Generally, the car financier will,
as a next step, build the dealer discount into the pricing
of the car loan.
Let's
now take the example further |
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| Agent
re-subvention |
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Agents market the financier's loan schemes to you and complete
all the paperwork on behalf of the financier. It is the agent
who negotiates the discounts provided by the car dealers.
The amount of discount that the agent is able to negotiate
from the dealer depends upon how many cars are sold from the
dealership by the agent and the relative importance of the
given agent's business to the dealership. The agent also receives
a commission from the financier for bringing him his car finance
customers. This commission is of two types. The first is a
standard commission given to the agent by the financier on
the loan amount disbursed to you. This could be around 3%
of the loan amount disbursed. The second is a target-achievement
incentive. Most agents give away the standard commission so
that their rates can be cheaper than those of their competitors'.
This is called the agent's re-subvention i.e. the agent giving
back his standard commission to the financier in order to
further reduce the borrowing rate for you.
Let's
now take the example a little further |
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| Borrowing
rate |
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From the above you would observe that you may get your loan
at 9.5% per year even though the car finance firm has priced
the loan at 11% per year. The difference between your borrowing
rate and the financier's base rate is the benefit to you,
the customer, created as a result of the car manufacturers'
subventions, dealers' discounts and agent re-subventions.
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