Car Loan Versions

Car Loans Versions:

There are four standard carloan versions

. •Car Margin Money Version

This is the most straightforward scheme of them all. For instance, if a car costs Rs. 1 lakh, a typical scheme would require you to pay at least 10% up front, and you would get a loan of Rs. 90,000. The Loan to Value (LTV) ratio is 90% in this case. The interest rate quoted will be on this Rs. 90,000. Thus if the rate quoted is 16% for 12 installments, the EMI would be Rs. 8,166. The interest rate is charged on a monthly basis.

•Car Security Deposit Version This is a variation of the Margin Money Scheme. In this, the company claims to give a loan of 100%, but asks for, say, 10% of the amount in advance, which it will return at the end of the loan period. In effect, you are still getting a loan of 90%. But the reason that you are being "shown" a lower rate is that the financier is making interest on your deposit for the period of the loan, when your money is lying with him. He uses that money to offset the amount that he is charging less from you. Some security deposit schemes offer interest on the deposit that you pay. As long as this rate is lower than the rate that you are paying in a normal margin money scheme, the designer can reduce the price of the loan.

• Car Advance EMI Version In this version the bank offers to give the complete amount as loan, but, requires you to pay some amount as EMIs in advance. It achieves two things: You are giving a down payment, thereby reducing the lending amount and the risk along with it. Also, the bank stands to gain on the amount of interest that it gets. Firstly, it does not give the 100% loan it had promised. Secondly, the interest that it charges on the amount that it has lent is in actuality greater. This is because, it calculates the interest rate on what it has lent, but forgets about the sum it has already taken in advance

•Car Processing Fees

This is the most seemingly innocent method. At the beginning of the period, the bank

requires you to pay 2%-4% of the loan amount as "processing" fees. In effect, the bank is lending you lesser than it had promised which increases the effective rate that you are paying. For example, if a bank lends you Rs. 1 lakh at 16% for one year, and charges you 3% as processing fees, you are in effect paying an interest of 22%!

Most schemes are a combination of these base versions.

EMI and Hire Purchase are the same, the only difference being that under Hire Purchase, the size of the installment was known to the hirer and interest was calculated in loan balances.

Under the modern EMI, a much smaller amount is adjusted against the installment in repayment of the principal and much higher against interest liability. But the hirer does not know the adjustment and the lifetime cost and is happier to pay a fixed sum, an affordable EMI for the period committed

In both the cases, the vehicle is in the vehicle owner's possession, but the legal ownership

rests with the financier. Under hire- purchase, it is automatically transferred to the buyer as soon as the last installment is paid, while under lease, a separate transaction of buying the lease expired car has to be made.

Depreciation is available to the buyer under hire purchase and to the financier under lease.
Everyday 04_3

Leasing is another form of financing vehicles. The buyer pays a fully tax deductible fixed monthly rental - there is no need to segregate monthly installment and interest and there is no security deposit.

Decide on your vehicle, and go for it. There is nothing to think of, except, of course, paying those installments on time!

Lease Financing:

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 NBFC's and are mostly availed by Corporates looking at it mainly from tax saving angle. With the

Indian Government plugging the tax loopholes, the lease scheme is not as popular these days as they were a few years back.

Comparison of Loan, Hire Purchase & Lease

Loan Hire Purchase Lease

Ownership You (the borrower) owns the car You are the hirer of the car which, the financier owns. You (the lessee) are the user of the car, the financier (lessor) owns it.

Depreciation You claim depreciation You claim depreciation The financier claims depreciation

Interest write-off The interest part of the installment can be claimed against income. The hire charges (excess amount paid above the finance amount) can be claimed against income. Entire lease rental and the maintenance cost can be claimed against the taxable income.

Related Articles:

»Home Mortgage Loans
»Boat Loans
»Bad Credit Home Loan
»Auto Loans
»UK Payday Loans