Four-wheel funds

There's a convenient avenue to quick funds if you own a car

The only assets Mukul Desai, 27, a Mumbai-based freelance photographer owned were his camera equipment and a car. Rent for his studio and residence, equipment maintenance and other related expenses translated into a hand-to-mouth existence and Desai had practically no resources to fall back on.

Finances were stretched due to a lull in work, and one day, when a key piece of his equipment failed, he had no money to replace it.

Personal loans were out because banks considered his occupation a risky proposition. And Desai, desperate to continue work, didn't know that he could in fact borrow money against his car.

If you're strapped for cash and have no other assets except a car to your name, there's another road to quick funds. Banks are now driving in business by offering cash overdraft facilities to car owners regardless of whether the car is fully paid for or under loan.

With a growing car market, banks are now looking at attracting customers through varied products rather than just plan vanilla loans.

There are several players in the fray; the latest to join the bandwagon are ICICI Bank and HDFC Bank. S Ramakrishnan, vice president and head-retail assets, HDFC says, "The product is targeted at customers who have a car as an asset and would like to make optimum utilisation of that asset for funds."

Standard Chartered Bank has been offering this facility, called Mileage, for the last three years, while HSBC extends it to existing customers only on a discretionary basis.

"The basic advantage of the product is its flexibility in terms of availability of cash and re-payment," says Murali Natrajan, head-consumer banking, Standard Chartered Bank.

So how does the product work? It's open to all car owners and all car types. And you don't have to be an existing customer of the bank either.

Currently, however, the product is not available in every city. ICICI's scheme, Car Overdraft, for instance, is offered to customers in 22 cities, while HDFC Bank offers its product in 16 cities including places like Calicut and Ludhiana.

"The product was launched as a value-addition to customers looking for flexibility in utilisation and repayment towards a line of credit which other loan products do not offer," adds Sachin Khandelwal, head-vehicle finance, ICICI Bank.

The way it works is that you open a current account with the bank that will be set up with the overdraft limit. The limit is based on the valuation of your car.

The bank values the car based on parameters like the physical condition, age, model, make, market demand and popularity, past insurance claims, likely depreciation, ownership pattern and resale value.

The valuation in some instances is done through an independent valuer, as in ICICI, while in others, for example, Standard Chartered, is through an internal team.

Since the depreciation of a new car starts as soon as it rolls out of the showroom and is rapid for the first three years, the valuer will keep that in mind while deriving a figure for a loan limit against a new car. He will also bear in mind the possible entry of new models from the same company and the resale value.

"The process is entirely market-dependent because the car is the underlying security," says Natrajan.

In terms of resale value, certain cars are preferred over others. For instance, the Santro, Zen, Wagon R, Honda City and Hyundai Accent command better resale prices in the second-hand market than cars like the Fiat Palio, Siena, Ford Ikon and Maruti Baleno.

Based on these factors, the minimum amount offered is Rs 50,000 and can go up to Rs 20 lakh, varying from 65 - 90 per cent depending on the value of the car and your credit history. While banks do not charge a processing fee, customers have to pay for the valuation. The charge for that will be in the range of Rs 500- 2,000, depending on your location.

Once you start withdrawing from the account, you are subject to interest on the amount withdrawn which is calculated by a daily reducing balance method. StanChart's interest rates range from 12 - 16 per cent.

HDFC Bank charges interest between 16 - 18 per cent, while ICICI Bank's rates range from 18 - 19.5 per cent depending again on the car and customer credit history. Compared to this, personal loans come at rates ranging anywhere between 16 - 22 per cent. However, there are fixed repayment schedules attached to them.

The maximum tenor of the facility is a year, renewable at the end of that period. In HDFC's case the maximum renewable period is 24 months and at the time of availing the facility the maximum age of the vehicle should be 10 years at the end of the tenor.

Repayment is done directly through the account and banks like ICICI require customers to pay a minimum of five per cent of the overdrawn amount on a monthly basis failing which a late payment fee (minimum Rs 500) will be charged.

Apart from the withdrawals, you can avail yourself of other services that the banks club with the account. For example, they all offer international ATM-come-debit cards, cheque books, net and phone banking facilities. Additonally, even corporates who own cars can make use of the facility.

If you have bought the car with a loan from another bank, the process of borrowing funds against that car requires a foreclosure of the loan. The hypothecation of the car shifts from the bank that granted the car loan to the bank you approach for the overdraft facility. The entire process takes about a week.

There are chances of subjectivity, however. The overdraft limit, for instance, is dependent entirely on the valuers' opinion of the car.

In most cases, chances are if you find out that the market value of your car is Rs 2.75 lakh, the valuer will put it at Rs 2 lakh. If your requirement of funds is large, you may not get what you think the car should fetch you at current market prices.

Also, if you own an unpopular (in terms of resale value) but exotic car like a Mercedes, you will stand to lose. Depending on the type of car, you will get a lower or higher overdraft limit and interest rate.

But at the end of the day, for people like Mukul Desai, this new road to debt is a convenient way to make up for lack of short-term funds.