Team-BHP - ARTICLE: How to get the lowest EMI & the best Finance Deal

Quote:

Originally Posted by carlover98 (Post 696916)

Hi all,

I had taken a car loan from HDFC 3 years back at a rate of 6% and they had fixed the EMI for 5 years (Approx Rs 8650 for 4.5 Lakhs for 5 years).

Will my EMI still remain the same till the end or will it change as the bank rates have gone up over the last 3 years? I dont want to get a shock of my life when I go to close my loan after 2 years.

Cheers!!

One of the first things you need to look at while taking a car loan is the monthly installment, popularly known as the Equated monthly installment (EMI). While different banks would give you different quotes depending upon their rules and regulations, you must compare your monthly outflow for the same amount and for the same tenure. Remember that the effective interest rate is a function of the reducing balance method being used to calculate it.

Reducing balance is the method of reducing the principal amount being repaid, from the outstanding loan amount. Every time you make a payment, the interest you pay is calculated on balance outstanding principal. Different banks can use different methods like:

Daily - In this method, the principal is reduced every day as if you were making repayment of the principal on a daily basis.

Monthly - In this method, the principal on which you pay interest reduces every month, that is, when you pay your EMI.

Quarterly - In this method, even though you keep on paying you EMI, the principal reduces only every three months.

Yearly - In this method, the principal is reduced finally, at the end of each year. This effectively implies that though you have paid back a part of the loan during the year, the principal outstanding gets reduced only at the end of the year.

This simply means that the earlier the principal reduction is done, the lower the amount you will pay to the bank. Nowadays, almost all banks offer the daily reducing method as it has more or less become a norm in the industry. However, it is better that one is aware of such things while going for a car loan.

Please check the terms and conditions of your loan and revert for a clearer answer.

Car Loan: Application Process
Once you have zeroed in on the car that you want to purchase, the next step is to apply for a car loan. There is a lot less paperwork involved than a home loan since the bank does not have to verify any asset as in the case of home loans. It takes about three to six days for you to get a car loan -a lot less time than a home loan.

Here is a step-by-step break-up of the car loan application process:

Step 1: Enquiry with a lender:

The first step is to get in touch with a lender. You need to get in touch with as many lenders as possible and get them to make loan offers to you. Then negotiate with them to get the best interest rate. Check if there are any special offers.

After you have got all the banks to make their offers to you, select your lender based on the information you have in front of you.

Step 2: Documents Collection

After you finalize your lender, the lender's direct selling agent will visit you and collect documents supporting proof of income, residence proof, and identity. You may be required to produce copies of IT returns, salary slips, bank statements, passport, driving license, and other relevant documents. These requirements vary from lender to lender.

Step 3: Field Investigation Agency Representative Visit

After submitting the documents, a field investigator will visit your home to double check the facts provided in the documents, such as your place of residence, tenure at work place, and so on. It is essential that you are present during this visit to clarify any query that the investigator might have. Otherwise, the investigator might not get all the facts clearly and could report that the facts you provided do not actually add up - thus forcing the lender to reject your loan application.

Step 4: Loan approved

Once the lender is satisfied with the veracity of your documents, the loan is approved. The lender then disburses the amount through cheques or demand drafts (DD).

Source:Apna Loan

How much car loan can I get?
Banks provide car loans based on the income of the individual. They normally provide loan amounts that are up to 2.5- 3 times the annual salary for salaried professionals or 6 times the annual income for self-employed professionals. Apart from income, other factors that decide the maximum eligible amount are the car model, the borrower's repayment track record, other existing loans, and so on.

Banks finance 90-100% of the ex-showroom price of a new car.

The maximum amount financed for used cars vary from 80-90% of the car's value.

If your income is not sufficient to get the loan amount that you want, you could club your spouse's or relative's income along with yours to get a higher loan amount.

Processing fee for car loans
When you apply for any kind of loan, be it a car loan or a home loan, the bank charges you some amount of money (which is some per cent of the loan amount required) as processing fee. This fee may vary from bank to bank. This amount, that needs to be paid upfront, effectively reduces the money you get.

Let us take an example. If the processing fee is say, 2 per cent and the loan amount you have applied for is Rs 2,00,000, then the processing fee works out to Rs. 2000. So, you will get Rs 1,98,000 in hand when the loan is sanctioned.

This fee is important for one to consider, since banks charge different rates. This actually can make a big difference on the real cost of the loan.

Car loan paperwork
Before you drive off in that new car of yours, there are just a few papers that need to be signed. These include the power of attorney which allows the dealer to go to the RTO and register the vehicle for you and transfer of title if you are trading in a vehicle.

Read each document carefully for errors. Once you sign on the dotted line, the deal is done. If something does not feel right, don't sign. Do not feel pressured or obligated to sign just because of the amount of time invested by the salesperson.

Charges applicable before and after a car loan disbursement
Very often we fail to read the fine print in a loan document. The real cost of your car loan is visible only when you factor in numerous other charges levied. If you intend to make comparisons with other types of loans, it is necessary to take into account these charges to arrive at the real cost. For example, the processing fee or prepayment fee in the case of a car loan will be different from that of a personal loan.

Here is a list of all charges that are levied before a loan is disbursed, through the course of the loan, or when you terminate the loan:

Description of Charges:

* Processing fee

* Prepayment fee

* Charges for late payment

* Cheque bounce charges

* Documentation charges

Processing fee:

The bank charges you an amount as a processing fee. This fee may vary from bank to bank. The bank deducts this amount from your loan before disbursal.

The processing fee is generally a percentage of the loan amount and is between 0.1- 1% for car loans. Some banks levy a flat charge of Rs 500- Rs 2000 upfront, and then deduct the balance processing fee (if any) from the loan amount before disbursal.

This fee is important for one to consider, since banks charge different rates. This actually can make a difference on the real cost of the loan.

Pre-payment fee:

Most banks charge you a penalty when you opt for the option of prepaying the loan amount. This prepayment penalty is levied because when you prepay your loan, the bank loses income in terms of interest.

Ideally, you should go for a bank that does not charge you any prepayment penalty. In case there is no such bank, you should go for the one that charges the least.

The prepayment fee varies from bank to bank. It varies from 1% to 5% of the outstanding loan amount.

Charges for late payment:

When the monthly installment (EMI) towards repayment of a loan is delayed the bank collects the installment along with late payment charges. The late payment charge is also known as the late payment penalty.

This is chargeable if you make the payment after the due date. Late payment fees range from 1% to 2% on the overdue amount.

Cheque Bounce Charges:

A cheque bounce is when a cheque that has been presented for clearance is not honoured by the bank because the amount written on the cheque exceeds the available balance in the account. If you have given post-dated cheques to the bank to debit the EMI from your account, ensure that you have sufficient funds in your account every month. If a single cheque bounces, the bank charges anything from Rs 200 to Rs 450 as penalties.

Documentation charges:

Banks levy documentation charges towards the verification of the various documents you provide towards the loan application. The expense on this account is usually passed on the customer, which range from Rs 250 to Rs 500.

Source: Apna Loan

Differences between motor insurance policies
Motor Policy A: This insurance policy covers personal injury and property damage caused by your car. The parties covered under this include:

* Pedestrians, occupants of other vehicles etc except those within your vehicle
* Driver of the other vehicle
* The passengers with whom your vehicle is for hire. Here, the owner of the vehicle gets an insurance cover on third party property damage only in case of an accident. In other words, if you are in an accident, the affected party can claim damages from you. The premiums generally are dependent on the cubic capacity of the car.

This cover does not go to fire and theft accidents, for which you need to pay additional premiums.

Motor Policy B: The premiums of this "comprehensive insurance" are much higher than those paid for regular insurance cover. This type of policy covers both third party insurance and own damage liability. Covered under this policy are:

* Loss or damage to the vehicle caused by environment as well as other reasons. That is, accident, fire, explosion, lightning, theft and other malicious acts are covered under this policy.
* Damage to the vehicle while it is under transit.
* Risks due to natural/man-made calamities like floods, earthquake, riots, strikes and terrorism.
* Damage to accessories like car stereo, car AC and other items that are not part of the original equipment.

Source: Apna Loan

Prepayment charges on auto loans
Most banks would charge you some prepayment penalty when you opt for the option of prepaying the loan amount. This is penalty is levied because when you prepay your loan, the bank is losing the interest income it would have got from you.

Ideally, you should go for a bank that does not charge you any prepayment penalty, but in case there is no bank that offers this facility, you should go for one that charges the minimum.

The idea of prepayment arises from the fact that you can get rid of your debt whenever your finances improve. Also, it is a great way of reducing your interest cost. Moreover, if there is another bank that is offering you a better rate (lower rate) you can shift your loan to that lender.

In fact, many banks even cap the amount (or a certain percentage) that you can prepay at one go. That is, the bank may put a clause that if you pay more than 5 per cent of the outstanding principal, you may attract a certain fee. This basically implies that banks would like to discourage you from prepaying the loan, as it results in a loss of interest income.

Quote:

Originally Posted by gt_bhp (Post 698007)

I'd like to understand the difference between an advance EMI and EMI in arrears. Which of these is advantageous to the user ?
Ex: For a loan of 5 Lakhs@9.5% for 36 months, I've been quoted EMI values of 15900 (1 Adv EMI) and 16030(without advance EMI).
From the various online calculators,I get the rate to be 9.56% when EMI is 16030. But I'm not able to understand how the EMI is calculated when 1 EMI is paid in advance. Would be of great help if someone can explain this to me.

Let me try to take a shot at explaining this.

Recently, I also got to face this muddle and had a bad experience with Kotak. The guy quoted me an EMI for 6950/- for 36 months on an advance basis+35 PDCs of the same amount. This means that your first EMI is a cheque dated the day you sign the loan agreement. Also, assuming you applied for a loan of Rs 200,000/- (like in my case), you will be disbursed an amount of INR 200,000 - INR 6950 (advance EMI) - processing charges, which came to about INR 190,000.

What this means is that
1. You part with INR 6950 right away
2. You get a loan of INR 10k less than you applied for (meaning you put in additional amount as DP)
3. Your interest payment starts immediately, and that too on a loan amount of INR 200,000, whereas the actual disbursed amount is INR 190,000

As against this, in the arrear EMI option, your EMI starts the next month from the month of loan disbursement. e.g., I got my loan disbursement on Jan 15th and my first EMI will be deducted on Feb 10th.

You also get (almost) the complete amount of loan you applied for e.g. INR 200,000 - processing charges (unavoidable!). Hence, in arrears option, you will give all 36 cheques in PDC format

Technically speaking, the interest component of the loan is more or less the same in both options (higher by 3-4k over a 36 months period in case of arrear EMI option). However, the concept of time value of money kicks in here.

In Advance EMI case, you have to part with a larger sum of money upfront (1 advance EMI+Shortfall in loan amount disbursed), whereas in Arrear EMI option, you can spread your payments evenly and do not have to part with the same amount upfront.