Bombay: Auto makers like Maruti Suzuki India Ltd and Hyundai Motor India Ltd have partnered with lenders to offer flexible auto loans.
Instead of a regular car loan, the borrower can choose from a graduated program, a balloon program, and other loan structures.
Combine that with lower interest rates now; flexible repayment options can look attractive. Based on data from Paisabazaar.com, borrowers can get new auto loans for interest rates as low as 7-7.5%.
The idea behind different loan structures is to offer repayment flexibility to buyers based on their cash flow.
In one of the loan structures, the lender initially allows low Equivalent Monthly Payments (EMIs), which increase over time. In another scheme, borrowers pay lower EMIs for the first six months, then set higher EMIs later.
Besides the regular loan, where the borrower pays a fixed amount each month, all other flexible repayment programs have a cost. They are similar to a moratorium to which the borrower takes advantage of a loan.
When there is no payment or lower payment for a few months, interest is added to the principal and interest is charged on it. Therefore, the total expense increases.
In progress loans, the only advantage that borrowers get is that they can avail of a larger loan amount. As the initial EMI is low, the borrower can get a larger loan. Borrowers pay lower EMIs in the first few years, and in subsequent years the repayment is accelerated.
These loans generally assume that borrowers’ incomes will increase in the future. But because they charge a lower EMI, the spending on progressive home loans is also higher than regular loans.
Flexible loan structures are for borrowers facing a crisis due to the covid-19 pandemic. Opt for such loans only if you think your finances will improve in a few months. When in doubt, borrowers should absolutely avoid taking on any new responsibilities.
If you are buying a new car, negotiate a discount on the vehicle if possible and finance it separately. In many cases, if you negotiate them together, you won’t get the best deal.
(Do you have personal finance questions? Send them to [email protected] and get answers from industry experts)
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