I am enjoying the advantage of this scheme, so would like to share it with all of you.
This is FOR you if : - You are ready to wait a period of atleast 15 days for the loan to be processed.
- You are ready to deal with bank officials who might not know that there is a scheme called as the Advantage Car Loan available (among many other things)
- You are ready for a bit of efforts initially (only initially - once the loan is approved, it's a cakewalk)
- You are eligible to get a loan upto more than 5 lakhs.
- You are ready to take a loan more than 5 lakhs! (This scheme is applicable only for loans above Rs. 5 lakhs)
- You are sure that you will be able to cover the loan amount in about 2 years. (You don't actually have to pay it back - you just need to put the money in a bank account - accessible to you at all times). This is best for those who are planning an all cash purchase or are planning to plonk down a big downpayment
This is NOT for you if : - You have other ongoing loans and you may not be eligible for the loan.
- You plan on paying the EMI and continue the loan for the full or majority tenure.
- You are prone to HUGE impulsive purchases and may not be able to maintain a certain amount of balance in your account (This will be more clear when you read the rest of the post)
So now that you have decided to read it further, here goes!
The Scheme :
For those of you who know
SBI MaxGain Home Loans, this is the same thing for Car Loans. For those who don't read on!
The
SBI Advantage Car Loan is a Loan Scheme that has an
Over Draft (
OD) account linked to the loan account. If you have understood this statement, you are probably on your way to the Bank - if not, well, read on!
Normally, when you opt for a loan, you get a fixed / floating (most probably floating) interest rate. In the tenure of the loan, if the interest rate rises, either the
tenure or your
EMI increases - in the end,
the total amount of money that you pay to the bank increases!
Also, the
EMI that is paid consists of a
principal component and an
interest component. As per the amortization schedule given by the bank, you will see that the
bank tries to recover the majority part of the interest as soon as possible - this is achieved by contributing a majority percentage of your EMI towards your interest and a lesser part towards the principal.
You may ask as to how this will matter - well, in case of fixed interest rate, it does not matter - the total payable interest will remain same, but in the case of floating interest, it can kill you!! As the majority part of the EMI goes towards interest, the re-payable principal component still remains large.
Now, if the interest rate rises (which it does every few months), the interest becomes applicable on the remaining principal (which is still quite large due to the
biased amortization schedule), hence, the
tenure or
EMI rises. For large loans with big tenures, this becomes a nightmare as the cycle continues and you see that you end up paying 3-4 times the interest of the principal amount (and more than double that of the anticipated amount)
To avoid this most of us go in for a
pre-payment option, wherein we make a downpayment of a substantial amount about once or twice per year. As this pre-payment amount is directly deducted from the principal, your tenure gets reduced, hence the total payable interest too.
So for a loan, we agree upon the following
facts :
- For floating interest, longer the tenure, greater the chance of increase in interest, hence greater the risk of increase in EMI/tenure.
- Regular pre-payments beyond the EMI amount will help to cover the loan amount sooner.
- It is most beneficial to foreclose the loan as soon as possible.
The corollary :
Making pre-payments means normally
adjusting finances,
scrounging, holding back on your wishes and always worrying about what to do if you
suddenly require a chunk of money! There is
loss of liquidity and generally raises the levels of stress as well.
Now you would be wondering why I am boring you with the obvious - well that's because, after telling the obvious, I intend to ask you :
What if there is an option wherein you can
control your interest rate, make
pre-payments,
not worry about the increases in tenure and
EMI, pay
much lesser interest, and at the same time
NOT LOSE LIQUIDITY ??
Sounds incredible, almost unbelievable, but yes, there is such a magic bullet and it is called as an
Overdraft linked loan account.
Normally, when you avail of a loan, the bank opens a normal loan account in your name. That account is a bottomless pit, i.e. whatever money you put into into it never comes out again.
Whenever you pay your EMI, a part of it gets paid to this account and another part to the Bank's interest account. When you make a prepayment, the entire amount goes into your loan account. Once the money goes into the loan account, you cannot withdraw it. Interest is applicable on the balance amount (Loan amount - total paid amount till date).
Now, consider such a loan account, with the only difference that you can withdraw money as well. Such an account is implemented by creating an Overdraft loan account.
Example :
You take a loan of Rs. 600000 (Six lakh rupees). An overdraft account is created with an
initial negative balance, i.e
-600000. Interest is made applicable on the
remaining negative amount. Once the balance becomes
zero or greater,
no interest is applicable.
The best part : You can deposit as much money as you want, whenever you want in that account (like a normal current account), and you can also
WITHDRAW money from that account as long as the balance does not go below -600000! The interest is calculated
only on the negative component.
So :
If you deposit 600000 in the account on day 1, your balance = -600000 + 600000 = 0. Hence interest = 0.
If you deposit 300000 in the account on day 1, your balance = -600000 + 300000 = -300000. Interest is applicable only on Rs.300000 (i.e.
half the interest rate!)
The best part : You can withdraw the money any time you want. As long as the money is there in the account, you will pay interest only for the balance amount. If you are in sudden need of money, you can
withdraw the
ENTIRE amount - you can then deposit it (or a part) back once your needs are fulfilled and the interest will be applicable for that amount for the amount of time you have used the money!
This scheme is available for Housing Loan with SBI, ICICI and Standard Chartered as far as my knowledge goes.
BUT, FOR CARS, ONLY SBI GIVES THIS OPTION, AND NOT MANY (EVEN FROM THE BANK) ARE AWARE OF THIS!!
So, you get the best of both worlds :
- You can avail a larger loan
- You can avail the loan for a much longer tenure
- You can control the total amount of interest you will pay
- You can remain agnostic of the interest rate
- You can make pre-payments without losing liquidity
- You balance the bias caused by the amortization schedule
- You lead a happy stressful life as you do not have to think about buying a diamond for your wife on her birthday (just because you have to make a prepayment)
- And the best - you get the new car you have always wanted, without having to adjust on other fronts.