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| Automobile Finance : Finance Tips |
| Look Out For Hidden Costs |
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There are several forms in which hidden costs creep in - these could be in the garb of Service Charges, Documentation Charges, Processing Charges etc., all of which increase the cost of your loan. A financier could charge you a lower rate of interest, but the real interest rate goes up because of these charges.
Sometimes, some other charges like Value Added Tax, Turnover Tax etc. may also be applicable depending on the financier and the scheme. These also eventually increase your effective cost of borrowing. |
| Study The Prepayment Options |
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Most financiers do not encourage prepayment of loans, as this is less profitable for them. So they levy fixed prepayment charges on the balance principal, sometimes as high as 4 - 5 % of the outstanding loan amount. On a loan of Rs 4 lacs and a balance principal of, say, Rs 2 lacs, you could end up paying prepayment charges as high as Rs 10,000.
Some financiers allow for part prepayments, while some insist on only full prepayments. Some may allow you to prepay up to a certain percentage of the principal in any given year.
When comparing like offers, it is important to check the prepayment terms, especially if you intend prepaying. |
| Study The Amortization Schedules |
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You normally pay Equal Monthly Instalments (EMI's) to your financier. This amount has two components - an interest repayment and a principal repayment.
The amount apportioned towards interest and principal varies each month. This is called amortization of the loan.
Financiers follow different methods of accounting for the monthly interest and principal, and it is important to keep a tab on this, particularly if you intend to prepay the loan. This will help you calculate the remaining principal with accuracy. |
| Clauses In A Typical Loan Agreement |
- All commercial terms such as the loan amount, interest rate, tenure, instalment amount, due dates of instalments, up-front charges, details of advance instalments (if any), down payment amount, etc.
- The amortisation schedule, conveying the break up of interest and principal with respect to each instalment.
- Hypothecation of the vehicle to the financier.
- An undertaking that the vehicle will be maintained in good condition, that all taxes will be paid diligently, and that the vehicle will be comprehensively covered with insurance, with an endorsement on the insurance policy in favor of the financier.
- A clause detailing how insurance claim money will be used in the event of accidental damage to the vehicle.
- A clause regarding payment of instalments irrespective of the condition of the vehicle.
- A clause that payment must be made without expecting notice from the financier.
- If payment mode is PDC's, then a clause containing an undertaking from the borrower that he will not close the account or ask the financier to refrain from depositing his cheque.
- Terms that will apply in the event of prepayment, including whether or not partial prepayment will be allowed.
- A clause restricting the use of the vehicle for lawful purposes only, and for no commercial use.
- Power of attorney in favor of the financier for signing on the borrower's behalf before statutory authorities such as RTO, insurance companies, etc.
- Clauses defining events of default - these comprise non-payment of rentals, violation of undertakings given in the agreement, start of insolvency proceedings, etc., with an overall clause authorising the financier to declare a default if he has reason to believe that his interest is jeopardised.
- Clauses containing the actions that can be taken by the financier in the event of default, including power to seize the vehicle, sell it to recover dues, etc.
- A promissory note for the loan amount (this is nothing but a legal document underlining commitment to repay the loan amount).
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