Understanding the Different Types of Car Loans

A car loan is the most reasonable option to buy a car when buyer doesn’t have any hard cash in his/her bank account. It is actually a boon for car lovers who can’t wait for years to drive their favourite car out of the showroom. In order to make the car buying process easier, financial lenders are rolling out various types of car loans keeping the buyers’ individual requirements under consideration. Here are the most popular car loans that you can avail while buying/hiring a car in India:

Car Loans

Bank-Offered Car Loans

  • Margin money scheme

This is the most commonly availed car loan scheme in India where the customer needs to pay a margin amount of a minimum 10% of the total loan amount along with the first monthly installment (EMI). The outstanding amount can be paid via post-dated cheques signed in the name of the lender. Under this scheme, a customer can typically avail a loan amount of Rs.5.5 lakh for buying a car worth Rs.6 lakh just by making a down payment of Rs.50, 000. Since this scheme can be availed at an EMI which is lower than that of the other schemes, availing it for a period of 5-7 years will enable you to save significantly on your monthly installments.

  • Advanced EMI scheme

In this car loan scheme, the bank pays 100% of the total car cost as a loan to the customer. However, to avail this loan the customer has to pay at least 5-9 EMIs against the loan straight away when the loan amount is disbursed. The remaining amount for the rest of the period can be paid via post-dated cheques. The EMIs for this loan are usually on the higher side as the interest is charged on the total loan amount instead of the outstanding balance. Since it requires advance payment of 5-9 installments right at the time of disbursement, you should assess your affordability well before applying for a loan under this scheme.

  • Security deposit scheme

This car loan scheme is a bit different from the margin money scheme. Here the customer is asked to pay an amount as deposit (typically 20%-30% of the total loan amount) against the loan which the lender refunds at the end of the tenure. To be precise, for availing a car loan worth Rs.10 lakh, the applicant has to pay 10% of that amount as deposit, while the remainder 90% of the loan amount will be provided by the lender. As the lender earns a fixed amount of interest on the amount paid by the customer upfront as security, these loan schemes are usually offered at lower interest rates. And this is what that makes them a better option than the margin money schemes. Since the lenders don’t ask for a guarantee of salary in such schemes, these are mostly opted by self-employed individuals.

Other Car Loan Variants

  • Hire purchase scheme

This is not a typical car loan scheme and operates somewhat differently from the conventional car loans. In such schemes, the customers enter into an agreement with the lender where they can get the car on hire, but also have the option to purchase it, as per the terms of the agreement. Non-Banking Finance Companies (NBFCs) who don’t have permission to offer direct loans use this method to lend money to customers. The borrowers need to pay a small amount of ‘option money’ (token money) to the lender based on their affordability while hiring a car through this scheme.

  • Lease financing purchase

This is another car loan variant where customers have to sign a contract/agreement with the lender in order to hire the car for a particular period of time. This agreement allows customers to use the car for the mutually-agreed period while the full ownership rights still remain with the lender. During the tenure of usage, the customer needs to pay a periodical rent to the lender for using the vehicle. Since these schemes help the consumers to save a huge amount of tax, they are mostly availed by corporates and NBFCs.

With so many varieties of car loans in the market, you need to compare all options based on your lifestyle, personal requirements and repayment ability before opting for one. This will not only enable you to get hold of the best possible deal but will also help to save a good amount of money in the long run. So, be smart and choose the best-suited one to make the best out of your car loan scheme.

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