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Car loans are the simplest of all kind of loans because it is a secured loan unlike a personal loan, which is unsecured. Taking a loan to buy a car is popular today and 90 percent cars sold today are financed. Organized and institutional auto finance has come of age and companies are aggressively marketing auto loans schemes by offering innovative offers to customers.
Most of the lending institutions finance up to 90 per cent of the cost of the car, while repayment period varies between three to five years. Few of them finance up to seven years as well, depending up on factors such as cost, rate of interest and make of the car. Most of the finance companies do not want to go beyond the five-year tenure as cars are considered to have a lifecycle of five years, after which even acquiring spare parts from manufacturers is difficult.
Types of Automobile Loans:
Some of the popular loan schemes are listed below. You can make your choice according to what suits you best.
Margin Money Scheme:
Under this scheme, you are required to pay margin money of at least 10 percent of the total loan amount, along with one equated monthly instalment (EMI). The balance amount is paid through post-dated cheques, or electronic clearing system (ECS), which are issued for the balance EMI’s covering the remaining period. With a repayment term of one to five years (in some cases seven), the Margin Money scheme is the most sought after. One of the major advantages of this scheme is that it has lowest EMI, compared to other schemes for the same amount of loan.
Lease Financing Purchase:
Lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the hire of that asset. The ownership rests with the lessor while the right to use the asset (car) is given to the lessee for an agreed period of time in return for periodic rental payments by the lessee to the lessor. Lease agreements are offered by Non Banking Financial Companies (NBFCs) and are mostly availed by corporate looking at it mainly from tax saving angel.
Advance Equated Monthly Instalment Scheme:
This scheme offers you 100 percent loan. You are required to pay up to five EMI’s in advance and the balance is paid through post-dated cheques covering the remaining period of the loan. The downside of this scheme is that though it offers 100 percent finance, you need to pay five to nine instalments up front. Besides, you go on to pay a higher EMI amount because the interest is charged on the entire loan amount.
Security Deposit Scheme:
Under this scheme you are required to deposit a specified sum as security deposit against the amount provided as the loan. This security deposit is refundable on completion of the full period of the loan. You receive interest on the deposit, which in most cases is lower than that charged to you on the loan amount. The EMI under this scheme is generally higher. The security deposit ranges from 10-30 percent of the total and is returned after the loan period. The deposit also earns a simple or compound interest, the tenure lasting for two to fiveyears.
Hire Purchase Scheme:
This is an agreement under which the car is let on hire and under which the hirer has an option to purchase the car in accordance with the terms of the agreement. Non Banking Finance Companies mostly offer hire purchase agreement. Broadly this option works similar to the loan option. NBFCs usually charge an amount as low as one Rupee, called option money, on payment of which the car passes on to the hirer. NBFCs have taken to this option, as they are not encouraged to give loans, which is a bank’s privilege. |
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