Personal Finance: The Easy Way To Buy A Big Car

PERSONAL FINANCE: AUTO LOANS
The Easy Way To Buy A Big Car

Car financiers are offering customised loans that enable buyers to set their sights higher.

By Dilip Maitra

Rohan Phadke, 32, a middle-level executive at an international consulting firm in Mumbai, has been doing quite well at work. In the last three years, Phadke got two promotions and a nearly 40 per cent pay hike. Last year, Phadke also upgraded his car from a three-year-old Maruti 800 to a Zen. He paid for the Zen with a car loan.

Yet Phadke isn't too happy. No, it's not that he's getting a raw deal at work. He thinks he's getting his due. Phadke's concerns are different. When he was upgrading from the Maruti 800, Phadke, who has a family of six, wanted a bigger car-a Maruti Esteem or a Ford Ikon, but his income wasn't enough to pay the higher equated monthly instalments (EMI) that a larger loan would entail. So, he had to settle for the smaller Zen.

However, if Phadke was to upgrade his car today, he would be able to leapfrog straight from his old Maruti 800 to a mid-sized Ikon or Hyundai Accent. Phadke could go for what finance companies are increasingly offering: a balloon payment scheme, where you pay a lower EMI in the initial years, and later, as your income increases, pay a higher EMI towards the end.

Welcome to the car financing bazaar, where a buffet of schemes designed to take care of different kinds of cash flows are coming into play. Car finance companies are introducing a flurry of new structures-like balloon payments, bullet payments and step-down options. Although the plain-vanilla fixed-EMI loan still constitutes nearly 90 per cent of car loans, the new variable-EMI loans are tailor-made for car buyers who want to spread their repayments to match their varying incomes. Says Virat Diwanji, 36, Vice-President, Field Operations, Ford Credit India, Ford India's finance subsidiary: ''I think most progressive car financiers will come out with tailor-made structures designed to meet special needs of people.''

The low-down

Here's a quick low-down on how these innovations work:

Annual bullet payment loans work well where large amounts are paid out as annual incentive or bonus, enabling employees to use this once-a-year sum to pay off a portion of the loan, and keep the EMI low. The annual bullet scheme that is offered by Ford Credit for a three-year scheme, for example, allows 30 per cent of the loan to be paid back as bullet payment divided into three instalments of 10 per cent each. Normally, in the 12th, 24th and 36th months (last month in a three-year tenor), the borrower has to pay 10 per cent of the loan value as the annual bullet payment.

Someone buying a Ford Ikon 1.6Zxi in Mumbai, for example, will have to pay Rs 56,036 as the annual bullet payment if he goes for a three-year loan covering 85 per cent of the value of the car from Ford Credit. As 30 per cent of the loan amount is paid off through bullet payments, the EMI for the balance 70 per cent will be lower than the normal constant EMI. So, a person who otherwise cannot afford the amount of constant EMI, will still be able to buy a higher-priced car if he gets some lumpsum amount every year.

The scheme is also suitable for a businessman whose income fluctuates. Readymade garment or consumer durables retailers whose incomes peak during festival months are good examples. Says Gaurang Shah, 38, CEO, Kotak Mahindra Primus: ''Loans can be structured according to the specific need but one will have to be careful about the borrower's exact repayment capability.''

In the case of balloon payment loans, nearly 20-25 per cent of the loan amount can be paid off in one go at the end of the loan period. Under Ford Credit's scheme, the balloon payment is Rs 1.24 lakh in the 36th month for a three-year loan. The customer, thus, ends up paying a much smaller EMI for the remaining 35 months. This scheme suits people who expect a large inflow of cash over the next three years. And if the borrower defaults on his payments, the car can be traded off by selling it back to the lender. Says Diwanji of Ford Credit: ''Yes, if needed we buy back the car and adjust the balloon payment from its resale value.'' Apart from Ford Credit, ICICI's car finance division also provides bullet and balloon schemes.

The riskier nature of the balloon structure, however, makes financiers lend only 75 per cent of the value of car, against 85 per cent in the other schemes. So the buyer has to pay more out of his pocket. Yet, there is an upside to these innovations. By paying marginally more than the plain vanilla car loan schemes, potential car buyers can enjoy the flexibility of matching the cash outflows on account of loan payments with their individual incomes. And, of course, make a switch from a Maruti 800 to an Esteem instead of just a Zen.

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