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Driven by attractive offers and promotions, the number of visits, inquiries and reservations at car dealerships is increasing. These special offers usually start in October and run until the New Year.
“Many companies offer Diwali bonuses to employees, increasing purchasing power and consumer sentiment,” said Raul Kapoor, co-chief executive officer (CEO) of Andromeda Sales & Distribution, a credit distribution network.
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In addition to getting a good deal on the car, buyers should make sure they get a favorable loan offer.
Festive offer
Many banks are offering lower interest rates and processing fee waivers. Some have waived foreclosure fees (see table). The key question for consumers is to what extent these offers will influence purchasing decisions. While festive offers may sweeten the deal, experts recommend evaluating the overall terms of the loan. “In addition to the approved facilities, review the interest rate and loan tenure and check for any hidden fees,” says Kapoor.
interest rate
Compare interest rates offered by different lenders. “Customized schemes can offer significant repayment flexibility with comfortable equal monthly installments (EMIs). However, they will not compensate for the higher interest rates. Even if the loan tenure is two to three years, high interest rates can negate the benefits,” said Adil Shetty, chief executive officer (CEO), bankbazar.com.
Consider whether to opt for a fixed or floating rate loan. Lenders may offer fixed-rate loans at low interest rates with no prepayment charges. “But fixed rates will only be cheaper if interest rates remain stable or increase over the life of the loan. If rates fall, a fixed-rate loan could become more expensive,” says Shetty. Rates are more likely to decrease in the near future.
Loan tenure
Lenders typically offer loan terms of up to seven years. Says Sahil Arora, business head (secured loans), Paysabazar, “A longer tenure reduces the EMI but increases the total interest cost and vice versa.
However, avoid too much EMI. “Don’t stretch your budget,” says Kapoor
Shetty recommends striking a balance between loan duration (and total interest cost) and EMIs.
Loan-to-value (LTV) ratio
This is the percentage of the total cost of the car that the lender is willing to finance. The balance, known as down payment, must be paid by the customer. Younger customers often prefer higher LTVs due to the difficulty of saving for lower payments.
“Lenders decide the LTV ratio based on their credit risk policy and the credit profile of the loan applicant,” says Arora.
Kapoor recommends avoiding 100% financing as the down payment reduces interest costs. “A car is an asset that depreciates, so it’s best to keep the acquisition cost low. Borrow only what you need. If your resources are invested in equipment that gives a much higher return than the car loan rate and you don't want to write get rid of them and then ask for a bigger loan,” said Sethi
Smart Tips
While festive offers can reduce costs, borrowers should consider the lender's transparency and quality of service.
Customers should be aware of their repayment capacity. “Most lenders prefer candidates whose total EMI is between 50-60 percent of their monthly income,” says Arora. Kapoor warns against strict loan terms and unnecessary additions that increase the loan amount. He adds that ignoring prepayment penalties and not reading loan contracts are mistakes borrowers should avoid.
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