Auto Loans
In the past few years India has been witness to a phenomenal rise in sales and profits of four wheelers of nearly all the leading manufacturers. The main reason for this trend has obviously been the ease with which one can get automobile loans from banks and also the substantial pay packets that the youth of the country have at their disposal nowadays in this booming economy. The types of auto loans offered are two wheeler loans, car loans and commercial vehicle loans.
According to statistics nearly 75% of the total vehicles sold in the last decade were financed through auto loans. In fact NCAER did a huge car market survey for Maruti Udyog which covered around 4,50,000 households across 342 cities/towns and 1,976 villages across the country which revealed some interesting trends.For e.g. in North India, two in every five cars sold in north India, for instance are still bought predominantly on cash while in the conservative south India, three of every four new cars are bought on finance and Delhi alone sells 35% of all the cars sold in India.
In an aggressive effort to woo potential customers, banks and financial institutions are coming up with innovative schemes which are also customized to suit the individual requirements of different customers. The share of bank and financial institution finance in new car purchase is on the rise, moving from a low under 40% pre-2000 to around 60% post 2004.
But intense competition was also responsible for car finance rates plummeting to 5% in late ’04 before stabilizing at 7% in ’05 and while HDFC informed the dealers of the higher rates through mails, ICICI had been more indirect in raising borrowing costs.
According to experts due to the high borrowing costs in the market, car financiers had no other recourse in order to protect their bottom lines.The various kinds of loans offered are the margin money scheme; advance equated monthly installment scheme, security deposit scheme, hire purchase scheme and processing fees.
In the margin money scheme a range with a minimum of 10% is to be repaid within a stipulated time and the balance is to be paid through post dated cheques. Since a margin has been paid at the outset, the EMI to be paid is generally lower whem compared to other schemes.Those looking for 100% fundng can go for the advance equated monthly installment scheme where EMI’s not lesser than 5 EMI’s are to be paid in advance and the remaining in post dated cheques. Because the EMI’s are higher, this scheme is not very popular.
In the security deposit scheme, a one has to make a deposit as security for the complete term of the loan which earns an interest which could be simple or compounded but lower than the interest rate on the loan. At the end of the loan period, the security deposit ranging from 10 to 30% is returned to the customer.Mostly offered by NBFC’s, under the hire purchase scheme usually an amount as low as one rupee known as option money is charged on payment of which the car is passed on to the hirer. The car is let on hire under this agreement and the hirer has the option to purchase the car in accordance with the terms of agreement.Under the lease financing purchase, one can lease a car and the lease amount is financed by an NBFC. The ownership is with the lessor and the right to use the car is with the lessee for a stipulated period of time in return for periodic rental payments by the lessee to the lessor. This scheme is popular with corporates who are looking at some tax saving.Under the processing fees scheme, a fees ranging 2% to 4% of the loan amount is paid the bank as processing fees.The customer has to read the fine print when deciding to go in for these various schemes or one might end up paying an interest higher than what was decided.
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