How to get the best loan deal for your dream car

Car buyers have reasons to cheer. Mostbanks have lowered their base rates by 0.25%. The State Bank of India (SBI) has slashed its auto loan rate by 0.75%, to 11.25%. But car buyers have to remember that these interest rates quoted by banks are rack rates. What a dealer offers you in terms of interest rates may sound different or even 'better' than what a bank offers you. Also, the dealer always sells the car as a package deal, which includes the cost of the car, loan, insurance and accessories. Moreover, they claim to offer the best deal. But before you get into the act of bargaining and play the number game of discounts and the EMI math, use the following thumb rules to decode the "best offers" sold by car dealers.

The loan math

A loan deal becomes sweet only if there is some kind of incentive from the manufacturer or financier. Otherwise, it can be as good as any other loan deal in the market. Try and separate the loan purchase from other negotiations in order to maximise it. Even if you can't maximise, you would know what exactly you've got.

For instance, a discount offered by a manufacturer can be clubbed in the loan calculation to make the loan deal look much better. Assuming that you take a Rs 4-lakh loan at 12% interest rate for 5 years. The EMI will cost Rs 8,810. Let's assume that the dealer has got a discount of Rs 25,000 to be offered to you. He doesn't tell this to you but reduces it from the loan amount, making the EMI as low as Rs 8,259. Or he may also choose to tell the customer that the effective interest rate he is offering is 8.8%. A discount of Rs 25,000 doesn't sound as lucrative as an interest rate of 8.8% in the current scenario," says Banwari Lal Sharma, AVP, CarWale Automotive Exchange.

Is it really a discount?

A car dealer offers a "good" deal only under the following circumstances. First, the dealer has a huge stock of a particular car and he wants to liquidate that at any cost. Second, the dealer has service issues, which has impacted his reputation. Hence he may design attractive deals to offset its impact.

If the dealer claims to give a good discount, you should first understand the nature of the offer. The dealer may be offering accessories, insurance, car loan etc. at a 'discounted' price. But it may not be the best and the lowest price in the market. "Car accessories such as music systems, Bluetooth are much cheaper in shops owned by the authorised dealers. If the dealer is giving a discount on the car cost or accessories, the dealer has already made his money by earning a good margin on accessories. Thus the dealer makes money by inflating the charges of the value-added services and the customer is usually unaware," says Rupesh Rele, a Mumbai-based auto expert.

Hence you should cross-check the offer not just with other dealers but also with other industry players who specialise in selling accessories, insurance or loans.

Cash Discount the best bet

A dealer may entice you with a cheaper loan offer which may seem half of what the banks offer. But there are chances he may build it into the cost in some other manner. "A customer should ask only for cash discount. Most dealers say they will offer a lower interest rate instead of a cash discount. That will reduce the customer's EMI. But car buyers should not fall for this pitch. If you are paying 1 lakh as down-payment for a Rs 5-lakh car loan, ask for a cash discount on that Rs 1 lakh. Then compare the discount offers from various lenders to identify the best deal," says Harsh Roongta, chief executive officer of Apnapaisa.com.

Age of the car

This is as important while buying a new car. Car sales have plunged in the past two years because of rising petrol prices and higher interest rates. Typically, dealers also offer the best discounts on these "dated" cars. But if you are looking to sell the car in 3-4 years, the manufacturing date of the car will be the sole determinant of the resale value. Let us look at two cars of the same make and sub-type. One with a manufacturing date of December 30, 2011 and the other with a manufacturing date of January 5, 2012. Both the cars have a registration date of May 2012. "The car manufactured in 2011 will be sold for a cheaper price and at a better offer than the one made in 2012. But if you intend to sell this car after 3-4 years, you will get a far lower value for the 2011-car although it is only 7 days older than the 2012-car," says Rupesh Rele.

Hence don't forget to look at the age of the car while negotiating on the price and the discounts offered by the dealer.

One rupee and free insurance

The cheapest is not the best when it comes to insurance. You have to look at IDV (insured's declared value), coverage of the policy and the tie-ups of the insurer before buying an insurance policy. IDV is the compensation you get in case of theft or total loss of the vehicle due to accidental damage. The IDV should not be less than 15% in the second year and 20% in the third year. Also opt for a comprehensive insurance coverage than third party liability. Compare the policy details with what the insurers offer and also the price and quotations.

Next time a dealer doles out the 'best' car loan offer, do your EMI math by getting separate quotations from banks based on your loan affordability. Compare those with the dealers' quotations. And always negotiate on cash discount. This will lower your loan amount, EMI and the interest outgo, too.