The economics of cheaper auto loans

Expect more such offers from manufacturers as sales momentum slips.A number of car manufacturers are trying to attract buyers with loans at lower rates of interest. Volkswagen, for instance, has started pushing its Vento (petrol version) at 6.99 per cent.BMW Financial Services, the car finance arm of BMW, offers customised services where they even offer zero per cent interest on some models. Honda Siel was offering the Honda City at 6.99 per cent till recently. It has since reduced the price of the sedan but also discontinued the lower rate scheme.Sumit Bali, director, Kotak Prime, says “With auto loans becoming expensive and the prices of cars going up, carmakers are offering such low interest rates to offset the higher cost of ownership of petrol cars.”The interest rate differential between availing a loan from a non-banking financial institution (NBFC) of the manufacturer vis-a-vis a bank is substantial.

The ex-showroom price of the Volkswagen Vento (petrol) is Rs 7 lakh. With an interest rate of 6.99 per cent and paying the equated monthly instalment (EMI) for three years, you pay Rs 21,490 a month, adding to Rs 7.73 lakh at the end for three years. The interest burden is Rs 73, 000. At the prevailing market rate of 11.75 per cent, your EMI is Rs 22,631. The total payment is Rs 8.14 lakh and interest outgo is Rs 114,000. This is an additional Rs 41,000 that you pay, or about Rs 1,138 a month. Even the prepayment penalty is lower, at one to two per cent. In comparison, banks would charge two to three per cent.How does car company’s NBFC give a loan at such a low rate, when most banks are lending at a rate higher than the base one of 10 per cent? Financial experts say the difference between the rates is borne by the manufacturer to push sales.Customers, who intend to purchase through such schemes should be aware of a few facts. They are likely to miss the cash discount that a buyer making full payment in cash would get. Besides, they may not get other benefits likefree insurance for the first year, which many dealers/manufacturers provide.
  

Even borrowers can get some cash discount. But the process takes a bit longer. Explains Harsh Roongta, CEO, apnapaisa.com, “A buyer who is borrowing needs to have three things clear on his mind – loan amount, loan tenure and either EMI or down payment.” Accordingly, he can ask several dealers or banks who are funding the same car for the best deal. “He will be able to get the best competitive rate by following this approach,” added Roongta.With car sales slipping sharply, expect more such offers. In May, domestic auto sales grew 10.6 per cent over the previous month, the lowest in 20 months. This and rising petrol prices would mean discounts from manufacturers and such special schemes to attract buyers. For the latter, it is always good to run a tough bargain.