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| Be in the Driver's Seat |
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Rattan Chugh
ExpressMoney
Monday, October 23, 2006 at 1319 IST
Don't let your car loan derail your finances. know your borrowing limits and drive home a hard bargain.
When they got married, Mahesh and Parul were working in large multinationals, taking home Rs 6 lakh and 4 lakh a year, respectively. Like everyone, they envisioned a good life, some parts of which came down to money, like a bigger car and their own two-bedroom apartment |
| With their combined income, and inevitable career progression, they felt confident of putting together those pieces. The bank was more that willing to finance their house and bigger car at an attractive rate. |
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They met their EMIs comfortably till Parul had a medical situation and was forced to take a break from work. In one shot, their income reduced by 40 per cent, while unexpected medical expenses spiralled up. Initially, they cashed in investments. When that ran out, they took personal loans and started rolling over their card dues. With each passing month, the debt trap noose tightened. Things might have been more comfortable if they didn’t have loans that left them with little room to manoeuvre. |
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| The Loan Amount |
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How much can you afford to borrow, is a question everyone faces. More so in today’s consumerist world, when banks are willing to lend 90 per cent of the value of an asset. Stay on guard and don’t get hustled into over-borrowing.
I feel not more than 15 per cent of an income should go towards servicing a car loan. Here, I have assumed that 50 per cent of the income goes towards your monthly expenses, 25 per cent for savings and 10 per cent for other expenses. If you also have a home loan going, 30-35 per cent of your income can go towards servicing loan EMIs. The higher amount is permissible, as a house is your biggest life spend and an appreciating asset.
When calculating your loan limits for a car, factor in your current liabilities, as well as loans you might take in the near future. Illustratively, on a 15 per cent threshold and a monthly income of Rs 30,000, your EMI works out to Rs 4,500, or a loan amount of Rs 2 lakh good enough for an entry-level car (See table: Find your drive). |
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The Deal |
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Choosing the loan tenure wisely is equally important. Sure, a higher tenure enables you to stretch out your repayment, but it increases your interest burden. Seen another way, the greater the EMI you are willing to pay and close your loan sooner, the greater your interest savings (See table: For more mileage).
With the loans business getting competitive, you can negotiate better terms on the stated offer. Each of the intermediaries in your car can sweeten the deal. Let’s say you want to buy a Maruti WagonR, which has an ex-showroom price of Rs 3.54 lakh and a registration cost of Rs 6,025. The bank’s rack rate is, say, 13 per cent, though this can be negotiated.
To start with, manufacturers give incentives to banks to push their models, some of which can be passed on to you. Similarly, dealers get incentives from manufacturers and direct selling agents (DSAs) from banks, part of which they can pass on to you in the form of cash or free accessories. Put together, you can negotiate a cash discount of about 12,000 (3-4 per cent), free insurance for the first year (Rs 12,794) and maybe a car stereo. Effectively, your rate of interest comes down to 9 per cent. So, be prudent and stay within your limits, and negotiate to get value for money. |
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