Check out the dealer’s offer with other options
Sudhir Vishwakarma thought buying a two-wheeler was well within his budget. After all, he had saved Rs 40,000 and needed just Rs 15,700 for the Honda Twister. He was mistaken. The dealer offered him a loan product with an equated monthly instalment (EMI) of Rs 1,719 for 12 months.
That meant he was paying Rs 4,771, as interest on just Rs 15,700, almost 30 per cent. On enquiring, he was told the following: The bank was charging Rs 2,500 as processing and stamp duty fee and the dealer was charging Rs 1,000 as commission. The interest rate on the inflated loan amount, Rs 19,200 (Rs 15,700 + Rs 3,500), was 12 per cent.
When he argued that at the rate of 12 per cent on a loan of Rs 15,700, his EMI should be Rs 1,395, he was told this was the best deal on offer.
CHEAPER OPTIONS
Despite being a collateralised loan, the overall cost for a buyer is expensive at dealer outlets when compared to a personal loan, which comes without the need to provide any security. “Also, these loans have high prepayment penalties of four-five per cent, making it difficult for a customer to even repay these early,” said Surya Bhatia, a certified financial planner.
There are cheaper solutions. “Nowadays, there are options from credit card companies whereby any purchase can be converted into six EMIs. This option could work out much cheaper,” said a financial planner.
Many card companies convert these purchases into interest-free EMIs, once the customer pays processing charges of two-three per cent of the loan amount. You could opt for longer tenures of six months to a maximum of three years, but the interest rates could be high, at 14-18 per cent. Depending on the rate, Sudhir could have converted the payment for an EMI ranging between Rs 1,400 and Rs 1,450.
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Then, there are personal loans. The rates vary between 14 and 25 per cent. On a loan of Rs 15,700, the EMI would again work out to Rs 1,400 to 1,500, a saving of Rs 219–319 a month.
If Vishwakarma can pay the amount quickly, even a cash withdrawal on his credit card may not be too bad a deal. He needs to work out the numbers. Reason: the moment you withdraw cash on a credit card, there is a one-time charge of two-three per cent. The interest on your net outstanding starts accumulating that very day. If one can pay off the money within the next two-three months, the interest cost may not be too high.
Of course, one of the cheapest ways would be to approach the bank where you have an existing relationship (account, deposits or loans). “Existing relationships give us an insight to understanding the applicant’s repayment abilities,” says an official of a nationalised bank.
Public sector banks, such as State Bank of India (SBI), provide two-wheeler loans at 15.75 per cent (8.25 per cent above the base rate). Similarly, Bank of Baroda gives the loan at 12 per cent, or four per cent above the base rate.
FINER MATHs
In the absence of many players, dealers can charge anywhere from Rs 2,500 to as much as Rs 5,000. The dealer cost can go higher if you are purchasing a recently launched bike or one that is popular.
Sometimes, the dealer and bank executive ask you for one or two advance EMIs as well. This can increase your overall outgo. A potential customer of a Yamaha FZ16 bike realised this when he walked into the dealer showroom. The executive (from Bussan Auto Finance) informed him that to avail of a one-year loan, he would need to pay two EMIs in advance. This means, though he would repay the loan within 10 months, he would be paying interest for 12 months.
Bhatia points out that many times, dealers quote the simple interest rate, making the loan look attractive. In reality, the rates are almost double if you check them on a reducing balance basis. “If you are buying in cash, negotiate for discounts. But, in case of a loan, one needs to evaluate available options and analyse the total outgo (charges plus interest paid) to take a call,” said Bhatia.