How to choose a car loan scheme

Banks and finance companies offer various car schemes: the former are generally stricter in terms of paperwork; the latter are more flexible, but they charge a little extra.

Margin schemes. This is the most common mode of financing available, where you are required to pay 10-30 per cent of the car value as down payment or margin, with the finance company providing the rest as a loan.

The EMI (equated monthly instalments) could be computed either on advance or arrears basis. An arrears instalment falls due at the end of the each month while an advance instalment falls due on the first of the month. The advance monthly instalment is lower than the arrears instalment for the same interest rate.

Security deposit schemes. The lender asks for a refundable deposit as security against the loan. This security, which is refundable on completion of the loan, could be 5-40 per cent of the total loan amount. Your deposit could earn simple or compound interest, generally at rates lower than the interest rate on the loan.

Though many companies claim to offer 100 per cent funding, the extent of finance comes down depending on the FD.

Factors to consider

• Choose a scheme that allows you to pay the EMI in advance.
• For schemes where you have to pay more number of instalments in advance, check the arrears option.
• If you are thinking of prepayment, an arrears scheme may suit you better as erosion in principal starts early.
• Though companies claim to offer 100 per cent financing, you have pay five to seven instalments upfront and the rest in post-dated cheques. As the down payment amount increases, the EMIs are reduced.
• Lenders give special discounts to those who have an existing relationship with them. This discount is usually in the form of a lower processing fee or lower interest.
• Zero per cent finance schemes are usually for specific car models; repayment tenures can go up to a year or a maximum of 18 months. Here the loan amount is not more than 70 per cent of the car value. To find out how much you're really being charged, ask for the discount you are foregoing if you are making an upfront payment. This foregone discount can be taken as the hidden cost of the loan.
• The leasing option is best suited for corporates with heavy tax burdens, as they can claim a write-off up to 30 per cent. The buyer should pay the write-off in the form of lease rentals and a 2 per cent lease management fee.