There are various schemes available for car finances at all times:

Margin Money Schemes:
If a car costs Rs. 1 lakh, you will have to pay at least 10 percent upfront with a loan of Rs 90,000. The loan to value ratio (LTV) is 90 percent. The interest rate will be charged on Rs 90,000. Thus if the rate quoted is 16 percent for 12 installments; the EMI would be Rs. 8,166.

Security Deposit Schemes:
You can get a 100% loan, but will have to pay 10% of the amount in advance, returnable to you at the end of the loan period. So, you are still getting a loan of 90 percent. But you are being shown a lower rate because your deposit is being used for further loans for the period, when your money is lying with the company. Some security deposit schemes offer interest in the deposit that you pay.

Hire Purchase And Lease EMI:
(Equated Monthly Installment) and Hire purchase are the same; the only difference being that under Hire Purchase, the size of the installment, was known to the hirer and interest was calculated in loan balances. Under Hire Purchase, the vehicle is automatically transferred to the buyer as soon as the last installment is paid, while under lease, a separate transaction of buying the lease expired car has to be made. Under leasing, the buyer pays a full tax deductible fixed monthly rental. There is no need to separate monthly installment and interest and there is no security deposit.

Advance EMI Schemes:
It is another version of the margin money scheme. The bank offers to give the complete amount as loan, but requires you to pay some amount as EMIs in advance. It achieves two things: You are giving a down payment, thereby reducing the lending amount and the risk along with it. Also, the bank stands to gain on the amount of interest it gets.

Processing Fees:
It is the most popular scheme. At the beginning of the period, the bank requires you to pay 2-4 percent of the loan amount as 'processing fees'. In effect, the bank is lending you lesser than it had promised that raises the effective rate that you are paying. For example, if a bank lends you Rs. 1 lakh at 16 percent for one year (12 EMIS) and charges you 3 percent as processing fees, you are in effect paying an interest of 22 per cent.

DSA/DMAS VS. Dealers:
A good bank normally has main Direct sales Agents (DSA) or Direct Marketing Agents (DMA) under which operate their subsidiaries. Facilities such as showrooms, or a test drive that are offered by a dealer are not available in case of a direct sale agent, but approaching a DSA has some other advantages. A DSA does processing and such other sundry jobs for which the customer does not have to spend precious time running around. Also, a DSA gives a better deal compared to a dealer. The profile of a customer plays an important role in the whole business. A business man normally like to go for a maximum of a 3-year tenure loan because he does not want to linger around paying interest for a long time. Anyway, he does not want to possess a particular car, especially a small one for a longer duration. In case of zero percent interest rate schemes, the EMI is very high. And, lesser the EMI, the higher is the tenure

Who is a co-applicant?
The car finance is taken either in a single name by an individual, or jointly, where there could be more than one person seeking the car finance. If there are more than 1 persons seeking finance, then they are co-applicants.


Do I need a guarantor?
No. But if your income does not meet the credit criteria, then you may be required to have a guarantor for your loan.

What are the various costs that have to be paid to the finance company to avail of a car loan?

• Interest cost which the finance company charges for providing finance.
  
• Processing fees: It is a one-time charge taken for processing and legal paperwork. It is in the range of 2-3 per cent of the loan and has to be paid upfront to the company.

What is the difference between 'Reducing Balance' and 'Flat Rate' of interest?
In the 'Flat Rate' system, the rate of interest on the whole amount is calculated over the entire duration of the loan and the principal, plus the interest is divided over the number of installments. But in the 'Reducing Balance' system, also referred to as the WDV (the Written Down Value) system, the interest is charged on the outstanding balance of the loan.

What is the security required against the loan?

• Hypothecation of the vehicle.
  
• Noting of the hypothecation charge in the books of the RTO.
  
• Guarantee of spouse, if employed, or a third party guarantee, if required.

What is the time duration or tenure of the loan?
Tenure is the time-period in which the customer agrees to pay the loan back to the finance company. In car finance, the choice is the customer's: he can choose from 1-7 year options, depending on his capacity to pay.

What is an EMI?
You repay the loan in equated monthly installments, or EMI, comprising of Principal and the Interest. The EMI depends on the quantum of loan, the interest rate and the term of the loan. I

Are there some benefits given by the manufacturers/dealers?
Yes, manufacturing companies or dealers, along with the finance company, do bring out schemes from time to time, which give some discount to the customer. The manufacturers/dealers/finance companies may share the discount.

What is the amount for registration and insurance?
The amount for registration is 3.5 per cent and 10.5 per cent of the showroom price of the car, for an individual and company, respectively. Insurance is 3.6 per cent of the showroom price of the car for both individuals and companies.

What are the conditions in the financing agreement between the individual and the finance company?

• The hirer accepts the entire risk of non-performance; non-delivery, breach or supply of inferior or damaged vehicle by the dealer and the finance company is not liable for the quality, condition or fitness of the vehicle.
  
• The hirer is entitled to the benefits of the warranties provided by the manufacturer/supplier of the vehicle.
  
• The hirer shall insure the vehicle and forward the insurance copies to the finance company regularly every year.
  
• Must pay all duties, taxes and fees or any other outgoing payables in the respect of the vehicle and to indemnify the finance company against all such payments.
  
• To maintain the vehicle in a good and serviceable order.
  
• To permit the finance company to inspect the vehicle from time to time. Not to sell, assign, mortgage, encumber or in any other way part with the possession of the vehicle without the permission of the finance company.

What are the options open to a finance company in case of default?

The finance company may demand the vehicle to be given back to the company.
The authorized official of the finance company can enter the premises where the vehicle is located and take immediate possession.

• Sell, use or give on hire the vehicle after giving a notice to the hirer.
  
• Require the hirer to pay for any damages and, in case of shortfall after the resale of the vehicle proceeds, for recovery of such deficiency.

What are the different documents in the agreement between the finance company and the hirer?

• Hire Purchase Agreement
  
• Schedule of Charges, Deposits and Rates.
  
• Irrevocable Power of Attorney
  
• Promissory Note
  
• FORM 20 for Registration of Vehicle
  
• Certificate of Inspection
  
• FORM 26 for Intimation of Loss or Destruction of Certificate of Registration and application of a duplicate certificate
  
• FORM 27 for assignment of new registration mark on removal of the vehicle to another state.
  
• FORM 28 for "NO OBJECTION CERTIFICATE" and grant of certificate.
  
• FORM 29 Form of Notice to transfer of ownership of Vehicle.
  
• FORM 30 report of Transfer of Ownership of a Vehicle.
  
• FORM 34 Application for making an entry of an agreement of Hire Purchase / Lease / Hypothecation subsequent to registration.
  
• FORM 35 Notice of Termination of an Agreement of hire-purchase / Lease / Hypothecation Dealer Authorization Letter
  
• Signature verification
  
• Disbursement Memo
  
• Checklist

HOW TO GO ABOUT GETTING YOUR VEHICLE FINANCED?

• Banks:
  The most obvious source of getting finance is a bank. Especially viable, if you have some kind of acquaintance with the bank, but an easy option otherwise too. Service is decent, though not comparable to some other finance companies. Banks may take longer to process your paperwork. But are still more reliable than some bank companies.
  
  
• Non-Banking Finance Companies (NBFCs):
  These companies are generally tied to dealers and manufactures. These companies are generally prompt. However, there are some things one must be careful about: Dealer discounts - Some financier's claim, that they can get better discounts from the dealer if the buyer gets the vehicle financed from them. This may not be true because of the dealer-financier nexus.

Finance Schemes:

• Zero percent finance: These schemes often work in one of two ways. Either the dealer discount is forgone and makes up for the interest you might have otherwise paid, or, the dealer and finance company absorb the interest but the loan tenure is relatively short.
  
  
• Attractive rates: Some financiers offer attractive rates (10 per cent) through flat interest schemes. A lesson in trickery with interest rates, the effective interest rate you pay is actually no less than 15-17 per cent you might pay by a reducing balance method. Remember, don't calculate percentage based on the total numbers; calculate based on the cash flow.
  
  
• Down payment schemes: These often promise total finance of the car but ask for a down payment which is then returned after a period of time. Your down payment earns interest at a rate about 2-3 per cent lower than the actual cost of your borrowing. We do not recommend this scheme unless you find the cash flow impact is favourable compared with other schemes and the financier is a reputed one.
  
  
• Margin money: The financier will pay for 70-90 per cent of the car up front with the buyer paying the margin.
  
  
• Advance EMI: Basically a hybrid of the margin money scheme where the advance EMI(s) are paid up front as part of a 100 per cent finance package. The number of EMIs paid in advance thus effectively reduces the loan amount.

Some Tips

• Narrow your choice of car down to two or three options. Try and do this around a period when dealers are trying to woo customers.
  
• Approach a reputed dealer close to your home stocking the car you are interested in and find out the best price he can offer with and without you taking finance from them.
  
• Check out the dealer's financier to find out if there are any special offers on. Get the best rates off the house financier without taking the dealer discounts to reduce financing cost. See if the in-house dealer financier combination is offering something special over and above the cash discount.
  
• Contact rival financiers and get their best rates - ask them to recommend a dealer for the car of your choice. See if that dealer is giving you a better deal.
  
• If there are no specials on discounts, you can take a dealer from here and a financier from there to structure your package. Opt for the cheapest combination of dealer and financier.
  
  One can never be too sure. Call two or more finance facilitators while choosing a finance scheme. Try and compare similar schemes so that you get a good idea of what you are in for. Make sure that you get the best value for your money, after all that's what consumerism is all about.