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| Automobile Finance : Typical Payment Schemes |
| Down Payment Scheme (Margin Money Scheme) |
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This is the most popular scheme and is offered by all financiers.
Here, you put up a specified down payment (also referred as margin money, which is usually 10 - 25 % of the asset value) and the financier funds the balance. The margin money is determined on the basis of the vehicle make, the loan tenure, and most importantly, your creditworthiness.
The amount financed is a percentage of the ex-showroom price of the vehicle, popularly known as LTV (Loan to Value Ratio). The LTV ranges from 75 - 95 % of the ex-showroom price of the vehicle.
Interest is charged on the amount funded, and post dated cheques (PDC's) towards the instalments will be collected on the same day as disbursal of credit.
Unless otherwise agreed upon, you are required to pay for the insurance and road tax, over and above the margin money. |
| Security Deposit Scheme |
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This is a tricky version of the Down Payment Scheme.
In this case, the financier usually funds upto 100% of the asset value, but simultaneously collects a security deposit from you. Thus, practically, his exposure is lowered by the amount he has collected from you.
The financier could pay you zero interest, or simple interest, or compound interest on this security deposit. But he definitely will charge you interest on the full funded amount, and collect instalments on the same.
The security deposit, along with interest if any, is refunded to you at the end of the contract. Please note that if interest on the security deposit exceeds Rs 2,500/- p.a, TDS is deductible @ 11.5 %
These schemes are not easy to compare with standard schemes. The lay observer can get carried away by the seemingly low financing rates offered under these schemes, without realizing the blocking (and hence interest loss) of his wealth in the form of the security deposit. |
| Advance Instalments Scheme |
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This is a small complication added to the Down Payment Scheme.
Here, against the finance disbursal, some money is collected upfront under the guise of advance instalments. This could be 2 / 3 / 4 or any number of EMI's which are collected in advance. Thus, the effective financed amount is actually lower.
However, interest is charged on the full finance amount and instalments are worked out on the same. The advance EMI's collected would be adjusted against the last few instalments. For eg. in a 2 year loan, if 3 instalments are collected in advance, then you repay only 21 instalments.
It is not unusual to see lower interest rates offered under these schemes, because the catch lies in the fact that, the actual financed amount is lower. Hence the real interest rate works out to be much higher.
Another devious tool used by financiers is the so-called Processing Fee, which also takes the effective financed amount lower. This is worse than security deposits (because you will never get this money back) or advance EMI collection (because you dont even get this adjusted against the last instalments). |
| Structured Payment Scheme |
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Most schemes offer a fixed monthly instalment payable throughout the tenure of the loan. A structured scheme, however, offers a built-in flexibility to step-up or step-down the instalment amount.
In a typical 3 year structured step-up scheme, instalments can increase progressively from Year 1 to Year 3. Conversely, in a step-down scheme, instalments would progressively reduce from Year 1 to Year 3.
There could also be a combination of step-up and step-down instalments. This scheme proves very useful to manage predictable upswings and downswings of disposable income. |
| Residual Value Scheme |
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Under this scheme, you take finance only for a part (say 75%) of the asset value - and the balance (25%) is paid at the end of the contract as residual value.
Some financiers give you a choice : pay the balance and retain the vehicle, or simply return the vehicle at the end of the tenure. Such schemes are designed to reduce your monthly outflow on instalments. |
| Schemes Based On Borrower Profile |
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No Income Proof Scheme : This is tailored for those of you who cannot, or would not like to furnish any income proof or IT returns. But you do pay a larger percentage of the asset value as margin money (usually 40 - 50 %) so as to reduce the exposure of the financier. However, proof of identity, residence and office are mandatory.
Salaried Employee Scheme : Some companies allow a 'deduction against salary' facility by which monthly instalments are deducted from the salary by the employer and directly paid to the financier. These schemes can be designed with higher LTV or longer tenure, structured around the career track of the borrower.
Self Employed & Professionals Scheme : Financiers relax their eligibility norms for professionals like doctors, CAs, architects, etc. based on their years in practice. These are based on assumed earning capacities, which could be higher than income details furnished.
Repayment Track Record Based Scheme : If you have a good track record of loan repayment, financiers could finance you without your having to furnish income documents.
Credit Card Holders Scheme : This scheme is for users of reputed credit cards, especially Gold Cards. If your repayments history is good, some financiers might offer you this scheme.
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