Car purchase finance options

Financing a car purchase has become rather easy these days. In recent years, a whole lot of financing options have emerged for the potential car buyer. Here we list a few options.
Loan: One of the more famous ways of buying a car is through a car loan. In this case, the car bought through a loan is actually in the possession of the lending institution. The official term used here is "hypothecation clause", which basically means that though you own the car, the bank/lending institution is using the car as a security against the loan taken by you. Thus, once you have cleared all the dues, this clause is removed from the agreement. The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.
Hire purchase: In this format, the lender actually buys the car on your behalf and sells it to you on hire purchase. In other words, you hire the car from the lender and own it once you have settled the dues. The self-employed can get tax relief on the interest paid for the car loan (approximately 15 per cent). Also, depreciation to the tune of 10 per cent per annum can be claimed depending on the price of the car.
Lease: In this case, the car is owned by the financier and leased out to you for a monthly installment, which includes both principal and interest payment. At the end of the lease period, you become the proud owner of the car and the financier transfers the car in your name. The self-employed can get tax relief on the interest paid for the car loan. However, no depreciation can be claimed as the car is owned by the financier.

Differences between motor insurance policies

Motor Policy A: This insurance policy covers personal injury and property damage caused by your car. The parties covered under this include:
Pedestrians, occupants of other vehicles etc except those within your vehicle.
Driver of the other vehicle .
The passengers with whom your vehicle is for hire. Here, the owner of the vehicle gets an insurance cover on third party property damage only in case of an accident. In other words, if you are in an accident, the affected party can claim damages from you. The premiums generally are dependent on the cubic capacity of the car.
This cover does not go to fire and theft accidents, for which you need to pay additional premiums. Motor Policy B: The premiums of this comprehensive insurance? are much higher than those paid for regular insurance cover. This type of policy covers both third party insurance and own damage liability. Covered under this policy are:
Loss or damage to the vehicle caused by environment as well as other reasons. That is, accident, fire, explosion, lightning, theft and other malicious acts are covered under this policy.
Damage to the vehicle while it is under transit.
Risks due to natural/man-made calamities like floods, earthquake, riots, strikes and terrorism.
Damage to accessories like car stereo, car AC and other items that are not part of the original equipment.

Old car or new?

This is totally dependent on your mentality. And of course, there is a price differential. So, it is better that you identify your needs first and then take a call on the one that suits your purposes.
For instance, if you are someone who is looking for a regular upgrade in say, every two-three years, then a second-hand car makes sense. Moreover, if this is your first car and you are trying to learn driving on it, a second-hand car definitely makes much more sense. On the other hand, if you are someone who is happy using the same vehicle for a number of years, then a new car is definitely recommended.
Of course, there are other important parameters like your negotiating skills and the previous owner. For instance, a Parsi owned car commands higher value as Parsis are known to maintain their cars very well. As a Parsi friend confesses, We do not believe in repair? we replace.? Whereas even the latest model in the hands of a Young Turk (a la Schumacher) would create imageries of burning tyres and engine on an overdrive.
Before buying any car, here are a few things you need to consider:
1. What is your budget for the car?
2. What is your monthly budget for the car?
3. How do you intend to use it? Within the city or even outside the city? (Heavy weight age towards the latter means that you need a MUV or multi-utility vehicle like Tata Sumo, Mahindra Bolero etc.)
4. How long do you intend to keep the vehicle? Now that you have answered the above, you know whether you want a new or an old car. But before you go for that old car, get yourself a cool car mechanic that is, a trustworthy one who will check the car for you. Ask him to check all the parameters like tyres, suspension, cooling etc.

Important clauses of auto insurance policies:

The vehicle insurance cover is not applicable if there is consequential loss, depreciation, wear and tear or mechanical and electrical breakdown. It is also not applicable in the following cases:
Drunken driving

Driver does not hold a driving licence

More people in the vehicle than the capacity permitted by the RTO

Damage incurred in a war zone.

Insurance Policies

Whenever you buy a car, you need to insure it or get the insurance papers transferred into you name in case it is a second hand car. There are various insurance players in the market who offer Motor Insurance Policies.
Popular among them are the General Insurance Company (GIC) and its four subsidiaries:
New India Assurance Company
Oriental Insurance Company
National Insurance Company
United India Insurance Company
Besides, there are several private insurance players, who have tie-ups with car companies to offer you motor insurance. So why do you need insurance or your car? Legally, you need to take motor insurance as soon as you buy a car. Every year, you need to renew the insurance policy by paying the premium. Basically, there are two types of motor insurance, Policy A or Policy B. While you can satisfy the legal needs by getting the former kind of insurance policy, it is always wiser to go for the latter, as it is much more comprehensive. Policy B is also known as comprehensive insurance policy.

Insuring your new car

Insurance amount: The amount of insurance is equal to the market value of the vehicle and not the original purchase price or book value of the vehicle.
Renewal: The insurance policy needs to be renewed before expiry of the policy period. Any delay in insurance renewal can deprive you of the insurance benefits and also attract a penalty while renewing. Remember, it is against the law to drive an uninsured car. Moreover, if the insurance policy isn’t renewed within the period of validity, the car will have to be brought to the insurance company office for inspection.
No-claim bonus: No-claim bonus (NCB) clause is basically applicable to holders of comprehensive insurance policy. The clause refers to the discount that a policy holder can receive on the amount of premium payable, if he/she has not lodged any claim during the year. The policy holder can claim a 20%, 35%, 50% and 65% discount in the premium in the first, second, third and fourth year of holding the policy. NCB cannot be claimed in the 5th year premium. The discount is based upon the claim that he has lodged with the company. Besides this, NCB is important when you are buying another new car because you can transfer this record (clean claim period) to your new vehicle. Let us work out some numbers on this. Say you have to pay Rs. 5000 as premium of your car. However, as you have a clean record, you would have to pay just Rs 1750, when you enjoy NCB @ 65%. Now, when you buy a new car which has a value higher than the current one, premium is undoubtedly higher. But you get to transfer the bonus percentage onto your new car. So, if on your new car, the premium that you have to pay is Rs 10,000, because of the NCB, you need to pay only Rs. 3500; that is, you save Rs 6500. But remember that the new car purchase has to be made within three years of sale of the old car.

Registering a new car at the RTO

Firstly, when you buy a new car, you have to register it with the Regional Transport Office (RTO). Remember that despite taking a loan from a bank, you are entirely responsible for the registration of the car.
Also, every car has its own Certificate of Registration (RC) book that tracks the history of the car. Moreover, as a car buyer, you need to ensure that all the legal forms should be filled in completely and submitted to the right authorities. Say, you live in Mumbai and bought a new car. You need to submit the relevant documents to the RTO under whose jurisdiction your address falls. If the new car is from another state, you will need to obtain a certificate of temporary registration from the RTO. In most places, this certificate is valid only for a very short period, after which a permanent registration number has to be obtained.
While driving the new car to the RTO for registration, take the following with you:
1. Application for new car registration or Form 20
2. Photocopy of the invoice, insurance policy, ration card or telephone bill as proof of address
3. Original Sale Certificate or Form No 23, Sales Tax Receipt, Octroi Receipt
4. Pollution Under Control Certificate from the manufacturer or Form No 22
5. Letter from the financier, in case you have taken a loan to purchase a car, addressed to the RTO asking them to endorse their lien on your car registration certificate book or Form No 34
6. Your PAN number.
7. Imprint of your car’s chassis number.

Repaying a car loan

One of the first things you need to look at while taking a car loan is the monthly installment, popularly known as the Equated monthly installment (EMI). While different banks would give you different quotes depending upon their rules and regulations, you must compare your monthly outflow for the same amount and for the same tenure. Remember that the effective interest rate is a function of the reducing balance method being used to calculate it. Reducing balance is the method of reducing the principal amount being repaid, from the outstanding loan amount. Every time you make a payment, the interest you pay is calculated on balance outstanding principal. Different banks can use different methods like:
Daily : In this method, the principal is reduced every day as if you were making repayment of the principal on a daily basis.
Monthly : In this method, the principal on which you pay interest reduces every month, that is, when you pay your EMI.
Quarterly : In this method, even though you keep on paying you EMI, the principal reduces only every three months.
Yearly : In this method, the principal is reduced finally, at the end of each year. This effectively implies that though you have paid back a part of the loan during the year, the principal outstanding gets reduced only at the end of the year. This simply means that the earlier the principal reduction is done, the lower the amount you will pay to the bank.
Nowadays, almost all banks offer the daily reducing method as it has more or less become a norm in the industry. However, it is better that one is aware of such things while going for a car loan.

Car loan paperwork

Before you drive off in that new car of yours, there are just a few papers that need to be signed. These include the power of attorney which allows the dealer to go to the RTO and register the vehicle for you and transfer of title if you are trading in a vehicle. Read each document carefully for errors. Once you sign on the dotted line, the deal is done. If something does not feel right, don’t sign. Do not feel pressured or obligated to sign just because of the amount of time invested by the salesperson.
Seven steps to negotiate the best car loan deal:
For most Indians, buying a car is a dream that comes second only to the dream of owning a house. This dream has become real for many Indians with the arrival of easy financing for car purchase. The decision to buy a car is, very often, prodded by the promise of easy financing that car dealers advertise. ? Do not compromise, “you can now own a Toyota Corolla for as little as Rs 10,000/ month”, says an advertisement, egging on all with monthly spare money of Rs 10,000 to own the dream Toyota. The mathematics of this foxes the prospective buyer. Is it real? You decide to check with the dealer. You find the offer is real, but the initial lump sum payment would be large. OK, you say to yourself. I’ll manage that. But what is the interest rate for the loan? The dealer tells you it is 11% and you wonder how come it is cheaper than a home loan? You proceed further and discover that this is really in lieu of the cash discount you could otherwise have got. You are no longer sure whether to believe him or not. You are not to blame. Car finance can become complex because of the financing deal between the car dealer and the bank. It will help you negotiate better if you follow the process below: 1) Finalise your decision on the car you want to buy. The interest rates vary from car to car; so, what is available on one car may not be available on another car. 2) Fix the amount of vehicle loan you need. Suppose the car costs Rs 8 lakh on the road and if you are ready to make a down payment of Rs 2 lakh, then freeze your loan requirements at Rs 6 lakh. Interest rates that you get also depend on the loan amount. 3) Ask around for preliminary quotes for the given loan amount for the given car. Freeze on the lowest EMIs that are offered. 4) Now, negotiate on the processing fees. Most times, the processing fees can be waived. 5) Then, start negotiating for cash discounts that can be adjusted against your down payment. The DSAs/dealers will offer to reduce the EMIs, but resist the temptation and insist on a cash discount. Also, the dealer/DSA will offer accessories in lieu of cash discount; again, resist and insist on cash discount. 6) Once you find that the cash discount limit has been reached, you can try for a small freebie on car accessories such as car mats, boot mats etc. 7) Remember to claim your no-claim bonus on the insurance policy for the new car if you have a claim-free record on your existing old car. Happy driving!