Mumbai: Auto makers like Maruti Suzuki India Ltd and Hyundai Motor India Ltd have teamed up with lenders to offer flexible auto loans.
Instead of a regular car loan, the borrower can choose between a step-up scheme, balloon scheme and other loan structures.
Combine that with lower interest rates now; flexible repayment options can look attractive. According to data from Paisabazaar.com, borrowers can obtain loans for new cars at interest rates as low as 7-7.5%.
The idea behind a different loan structure is to offer buyers repayment flexibility, depending on their cash flows.
In one of the loan structures, the lender initially allows for the low equated monthly installment (EMI), which increases over time. In another scheme, borrowers must pay lower EMIs in the first six months and subsequently set higher EMI.
In addition to the regular loan, in which the borrower pays a fixed amount every month, all other flexible repayment schemes come at a cost. They are similar to a moratorium that the borrower grants to the loan.
When there is no payment or less payment in some months, interest is added to the principal and incurred on it. Consequently, the total expenditure increases.
In progressive loans, the only benefit that borrowers get is that they can benefit from a higher loan amount. As the initial EMI is low, the borrower can obtain a larger loan. Borrowers pay lower EMIs in the first few years, and in the following years, repayment is accelerated.
These loans normally assume that borrowers’ income will increase in the future. But as they charge a lower EMI, the expense for incremental home loans is also higher than for regular loans.
Flexible loan structures are targeted at borrowers who are facing a crisis due to the covid-19 pandemic. Opt for these loans only if you believe your finances will be better in a few months. In the event of uncertainty, borrowers should avoid assuming any new liability.
If buying a new car, if possible, negotiate a discount on the vehicle and finance separately. In many cases, if you negotiate them together, you will not get the best deal.
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