I wish I could find a article like this when I started my hunt for a car(& car finance).
Well, when it came to me to buy a car, I decided that
I will not pay full price of the car in one shot.(Even though I could). Instead I’ll take a loan.
I will not(repeat -’will not’) pay a single rupee as interest on this loan.
I will make money out of this transaction.
The entire loan process must end in 2 days.
And I achieved all the above(profit has to come but it would in next 3 years.)
Here is what I did and suggest you to consider:
First objective was very easy.I just started calling banks/car financers.
I called up ICICI, HDFC and the car dealers, they all gave quotes and filled my mind with EMI, 3050/2090 ratio, first EMI in advance.dealer started with free insurance & RTO(but much higher EMI), gift vouchers, 10% off on accesories .
Bottom line was same.take loan from us and pay interest(which I was not ready for.)
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There are various ways where in I could have been fooled. As this was my first car, I had no idea on accessories, servicings and lots of other stuff. So loan rates could have been dropped but more charges on accessories/services or other way round like showing discount on RTO, Insurance, Accessories and charging more interest.
I see all of this as loss of money either today or tomorrow.
So, I started looking out for things where prices were not subjective.
Car Price: This made my life a bit easier.Car prices are published and are pretty much followed(so you won’t find that 4Lac car being sold at 3.5 lac elsewhere). Discounts would be there but not to such large degrees.
Car Servicing: is standard like 2-3 per year free of cost for first year.(Can vary with car model).
Car Accessories: I went for a fully loaded car.so no more cheating on accessories.(some friends adviced not to spend money on less used features of the fully loaded version, but I igored them; because they also told me not to take car loan, they just didn’t understand the money making behind it.).
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First thing was to bring different quoting styles to one simple form, where in I could compare loans, and this all must be very easy to calculate without a computer or a calculator. This is useful if someone makes an offer to you and says take it now or forget for ever.
I had situations like this! Because I was buying on 31Mar04.Remember, car dealers have end of the quarter selling pressure, same for Banks. so always go for a car/loan towards end of the quarter.
Well, whenever anyone gives you a quote, ask them -
How much will I pay per lac.
Is the first EMI in advance?
(Refuse to pay any charge other than EMI.)
These two questions will reveal a lot.Never agree to make downpayments. Agree to pay first EMI in advance - makes life easier for you, otherwise loan processing may take unnecessarily long. Nobody is out there to offer your loan below a pre-determined rate.(This is usually between 5.5-5.75%). So Downpayment, Arrear payments, advance payment all boils down to one and the same thing.(Refer to my Excel formulas below, they help you de-mystify all such work-arounds).
Do not over negotiate. If you get reduction of 0.25% or something. It usually amounts to much lesser money than one might think. Always, negotiate for better rates but keep things simple.
Remember, money making should bring peace and happiness in life. what good is it if you get 0.25% better deal but everyone in bank hates you? Keep in mind that these are the people you would deal with for next 3-5 years while repaying the loan.(Think of a rainy day, occasional bounced cheque or delay in payment say 1-2 days). If they choose to opt the strict way you will pay good deal of charges. So make money, make friends.
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CAUTION: Some dealers say they will negotiate a better rate from banks(and you get to choose the bank also), but they invariably charge you the same or more. if they offer discount on accessories you know where it’s coming from. Dealers are not best with money, otherwise why don’t they open a bank or investment agency?
So simple:
Dealer: provides a car.(+ provides discounts for buying from him like Free Insurance, RTO etc.). or we would go another dealer.
Bank: provides money.(provides better rate, otherwise we go another bank).
Don’t mix the two.
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Now, that you have decided on a car, dealer and bank(with a preferable rate). Book the car, make your part of payment.(Usually you get loan upto 90%, some can go upto 100% but they need more complicated stuff like FDs lien or shares lien or corporate tie-up or whatever.). Again, I like simplicity.
Agressively followup with Bank to disburse the loan(usually they are very slow once you have singed on the dotted line and handed over your PDCs.).
Now, the cash that you have amassed which is waiting in your bank a/c or FDs. What interest is it earning in FD? 4, 5, 6%? ok, in co-op bank 8% wow! Don’t forget the taxman, even if you get 8%, he would happily bring it down. plus the cash gets stuck over 36+ months. How would you pay EMIs?
Better way is to move this into MFs which provide faster appreciation & good liquidity. If you’re very conservative go for Debt schemes, if you are bullish go for equities and for oppoprtunist go for balanced ones.
Someone might say it’s risky.well’biggest risk in life is, not to take a risk’.
Speak to your investment guru(your friend or your banker or anyone you trust) and move the cash lying in bank a/c to MFs. I suggest MFs because then you do not have to worry about shares and sunsex and mkt news and govt strategy. MFs does it for you. Plus the tax-free dividends!
Just buy 2-3 different reliable(proven track record) MFs and invest the money. Usual range of returns you can expect(conservatively).
Debt - about 10%.
Balanced - 12-15%.
Equities - 15-20%.
If you’re of type fill-it/shut-it/forget-it, Go for a Systimatic Withdrawal plan. Which means withdraw only the EMI amount from your funds to your bank a/c just a day before EMI cheque.
I did some calculations for myself:
From my FDs I took out amount exatly equal to my car loan minus 1 EMI.
Now if I get lowest return on MF 10%= I save 4, 000.
For 12%= 20, 000
For 15%= 40, 000
For 20%= 80, 000.
(Capital Gain Tax considered!)
Last Year, some MFs provided returns over 100% if we just hit 50% then my calculation shows that I would make lots of money and keep the car.
Remember, do not repay the loan fully in advance.even if you made lot of money thru MFs. you will pay penalty plus you would lose chance to make more money.
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Now something for Power users - those who have a Excel and can use it!
Open a new Excel sheet and copy the following:
First EMI is assumed to be in-advance
Loan Amount 100000 Fille in your Loan amount
EMI 3006.28212864514 (Ask the Bank.)
Tenure 36 (You Decide, this has to be in months)
Calculated Rate =RATE(B3-1, -B2, B1-B2)*12 <= This is a the effective Interest you are paying.
MF returns Rate(Expected) 0.5 <= Your guess how much rate of Interest MF would provide you
Profit =-FV(B6/12(0.5+0.566%), B3, -B2, B1-B2) <== 50% From Tax-free dividend & 33% paid as Tax on capital gains.
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Good Luck.
Any problems, do not hesitate to write.