Security Deposit Schemes for car loans

Usually, when one gets an auto loan, it falls under the margin money scheme, where the borrower pays at least 10 per cent of the total vehicle cost as a down payment to the dealer, and the remaining amount (in this case, 90 percent) is financed by the financier. A security deposit scheme works slightly differently. In this, the financier claims to give a loan of 100 per cent, but asks for, say, 10 per cent of the amount in advance, which it will return at the end of the loan period. In effect, you are still getting a loan of 90 per cent. But here, the financier will offer a lower rate of interest, as it will earn an interest on the deposit amount you have paid up front. This interest which the financier keeps is what allows it to offer you an apparently lower rate of interest.

Some security deposit schemes offer interest on the deposit that you pay. As long as this rate is lower than the rate that you are paying in a normal margin money scheme, the designer can reduce the price of the loan. Suppose you had to borrow Rs 1 lakh. The financier might ask you to put in a 10 per cent deposit of Rs 10,000, on which you might be offered an interest of 14 per cent. So even if the financier is letting you borrow the full Rs 1 lakh amount, it is borrowing the additional Rs 10,000 from you at 14 per cent, and then is lending you the same money at 16 per cent. So the financier is making extra money, which lets it afford to reduce the rate of interest on the loan. Depending on the exact terms of the scheme, some security deposit schemes might end up being better than margin money schemes in the long run.