What is car finance?
- by Abhishek Nigam
- May 8, 2012
- Views : 2450
Car finance is probably one of the easiest ways to get the car of your dreams. We tell you what car finance is all about
What is car finance ?
A car is pretty much a very important necessity for the common man. However paying the full amount and getting the car of your dreams may not always be possible due to financial constraints and a bevy of other reasons. That’s where car finance comes into the picture. Not only can you get the car you always wanted but also end up paying for it in easy monthly installments over a specific tenure.
So how do you go about it? Firstly, compare rates of all banks and get their best rates. Also ask for recommended dealers for the car of your choice to see which dealer is giving you the best deal. You apply for a loan and you buy a car. You go to a bank and fill out some forms and they disburse your check. Sounds simple enough, doesn't it?
However, your application could be denied or cancelled, or you may get an offer at a high interest rate if you have bad-credit history. All banks go through your financial history when you apply for a loan. Different banks have different standards of judging a credit history. So it is wise to clear up all old debts, if you have any, before you apply for a loan. This will help you get your loan approved at lower interest rates.
You repay the loan in equated monthly installments (EMIs), comprising of principal amount and the Interest Rate. The EMI depends upon the loan amount, the interest rate and the tenure of the loan. Also don't just evaluate the deal based on monthly EMIs. Calculate how much you will be paying over the tenure of the loan. This in turn is a function of Interest rates.
The interest rate depends on the Flat Rate and Reducing Balance method. In the Flat Rate of interest, the principal amount (on which interest calculations are made) remains same for the entire tenure of the loan. The total interest is divided over the number of installments to derive the EMI.
Reducing Balance, means reducing the paid-up principal amount (on which interest calculations are made) from the outstanding loan amount. The interest you pay is calculated on outstanding principal balance. Car loans typically don't require a guarantor but if your income does not meet the credit criteria, then you will be required to have a guarantor for your loan. Guarantor can be your spouse, if employed, or a third party guarantee will do.
Processing fees is a one-time charge taken for processing and legal paperwork. At the beginning of the period, the bank requires you to pay 2-4 percent of the loan amount as processing fees. For example, if you take Rs.5 lac at 15% for 5 years (60 EMIS) and charges you 2 percent as processing fees, you are in effect paying an amount of Rs.10,000.
If you chose to pay up your entire money before the tenure, a Pre-payment penalty is charged. So know about such penalties before-hand to avoid future misunderstanding between you and the bank.
Also keep in mind that most banks offer you the option of pre-payment, but they do not give the flexibility of part-payment.
You "have-to" insure your car. It is against the law to drive an uninsured car. You must get an insurance policy for a year's duration, after which you have to renew it. The amount of insurance is equal to the market value of the vehicle and not the book value of the vehicle.
The premium is added to the EMI paid for the loan tenure and you are insured for the amount you have taken, incase something unexpected happens Assured amount will be given to the bank without burdening the members of the family. So keep these few things in mind while financing your next car. You have reached the best spot to get the best loan, for your car, from the best banks. Go, fill the application form now!
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.
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 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
Where to avail loans?
The most obvious 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.
• 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.
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