An Easy Guide to Car Finance: The Finance Scheme Product Range

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An Easy Guide to Car Finance

THE FINANCE SCHEME PRODUCT RANGE:

If you have been shopping around for car finance schemes for sometime, I am sure you must by now be submerged under a plethora of schemes that financiers have offered you. Financiers consider it fashionable to brand their schemes but at the end of the day they are all concocted by cleverly mixing the various scheme parameters and documentation requirements that I have mentioned in the earlier sections. Some of the popular packaged schemes are:

Margin Money Scheme:
This is a basic car finance scheme where the finance amount/principal amount is less than 100% of the value of the car (typically 85%).

Instalment in Advance Scheme:
Instead of collecting high margin money / down payment financiers often collect a certain number of instalments in advance so as to preserve the LTV. 100% value of the car is taken, interest charged on it and instalments worked out on the same. Usually 2 to 5 instalments are collected in advance. This would be adjusted against the last few instalments. In a three-year loan, if four instalments are collected in advance, then you repay only 32 instalments.

Stepped Schemes:
In a stepped scheme the instalments progressively increase or reduce from year to year. There could also be a combination of step-up and step-down instalments. This type of scheme works best for salaried employees where there are predictable movements in disposable income.

Balloon Scheme:
This is a scheme where you take finance only for a certain value of the car, say 85% and the balance 15% is paid at the end of the contract as a bullet payment. Such schemes result in lower instalments and are usually offered by financiers who have direct tie-ups with manufacturers or dealers.

Security Deposit Scheme:
A certain percentage of the value of the car is taken by the as a security deposit. The financier funds 100 % of the value of the car and the interest and instalments are calculated accordingly. But although the financier is funding 100% of the value of the car, his exposure is lowered by the amount collected as security deposit. The security deposit could be interest bearing or non interest bearing and is refunded to you at the end of the contract.

No Income Scheme:
Such schemes are sanctioned without you requiring to give your income proof as listed above. Although this may sound great, the flip side is that the amount financed is much lower (around 50%) than what you would have got funded had you submitted the income proof. The other documentation is nonetheless mandatory.

Relationship Offers:
These are special schemes offered by financiers, especially based on the relationships that you have with them, by virtue of being an existing customer or a customer of any of their other products. This usually entails a reduction in the interest rate, or an extended tenure.

THE FINANCIERS:
The various players offering car finance schemes can be categorized under two broad heads namely
• Banks
• Non Banking Finance Companies (NBFC)
Usually Banks have an advantage in sourcing cheaper funds and are hence able to offer better rates of interest than NBFCs.

Several of the financiers have tied up with manufacturers to offer competitive finance scheme on the respective manufacturers' products. It is through tie-ups like these that manufacturers pass discounts to the end customer that finally translate into a lower instalment payments.

Almost all financiers have tie-ups with Dealers because the dealership is the place where 90% of the finance enquiries originate. To promote sale or to liquidate stocks, dealers offer discounts to financiers with whom they have tied up who in turn pass it to the customers in the form of reduced interest rates.

It would be a good idea to avail of schemes either from a financier who has a preferred financier tie-up with the manufacturer whose car you have chosen to buy or a financier who has a tie-up with the dealership from which you are purchasing the car. Making it even easier for potential car buyers some manufacturers have floated car financing arms. A manufacturer by virtue of his size can mobilize cheap funds and hence give you a good deal provided you are buying one of their models.

Most retail banks and leading financial institutions offer car finance schemes. Interest rates vary fom 14% to 16%. But remember - these rates are only indicative to give you a flavour of the market. A bit of negotiation can help you reduce interest rates by as much as 2%! Some hard bargaining and leveraging your banking relationships can go a long way.

Source

January 2002

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