ICICI Bank has recently launched a car loan product ”Smart EMI” in association with TranzLease (TZL), an automobile leasing company. The loan facility is currently available for corporate and salaried customers. The Smart EMI car loan takes care of the insurance and maintenance of the car too. i.e., you do not have to pay anything extra for insurance and regular maintenance of the car during the loan tenure. Such costs are already built into the loan EMI. You have 2 loan tenure options (3 years and 5 years). Another claim by ICICI Bank is that the EMI under Smart EMI product is lower than the regular car loan EMI.
After 3 years (or 5 years as the case may be), you get the following 2 options:
- Own the car by making payment of the agreed value. You pay TZL an agreed amount (the amount is decided upfront) and own the car completely.
- Surrender the car to TZL. In the case of surrender, you get a guaranteed amount. In addition, you may get “Good Driving Bonus”, which should depend on the state of the car at the time of surrender.
Why Is the Loan EMI Lower?
As I see, you get the loan for the lower EMI. Let’s say the purchase value of the car is Rs 10 lacs and agreed upon resale value of the car is Rs 4.5 lacs. Then, you must take loan for only Rs 5.5 lacs. A lower principal amount puts a downward pressure on the EMI.
On the other hand, insurance and maintenance charges over the next 3 or 5 years get added to the principal amount. This will increase the loan amount and the EMI. The loan is for 3 or 5 years, which can put upward pressure on the EMI. However, most car loans are short term loans. So, not much of a difference there.
The net impact may be a lower EMI.
Do Not Just Go by the Lower EMI
A lower EMI does not mean you are getting a better deal. To own the car after 3 (or 5 years), you will have to make a further payment to the leasing company. In my opinion, ICICI Smart EMI card loan is more about convenience. It may not turn out to a financially better deal as compared to a regular car loan.
Let’s look at an example on the website. You can get the deal for your preferred car on the website. The website will also contrast the numbers with that of a regular car loan. However, don’t take those numbers at face value.
| Maruti Swift ZXI Petrol Mumbai | ||||
| Ex-Showroom price | 7,53,000 | |||
| On-road price | 8,65,728 | |||
| Loan Variants | Classic 36 | Life Style 36 | Classic 60 | |
| Down payment | 1,88,028 | 29,898 | 1,88,028 | |
| EMI | 18,881 | 23,740 | 16,764 | |
| EMI Tenure | 36 | 36 | 60 | |
| Option 1 (Surrender)1 | ||||
| Guaranteed Bonus2 | 28,040 | – | 84,070 | |
| Good Driving Bonus3 | 3,38,850 | 3,38,850 | 2,07,075 | |
| Option 2 (Buy the car)4 | ||||
| By paying | 3,10,810 | 3,38,850 | 1,23,005 | |
- “Surrender” means giving back the car to the lease company. i.e., you choose not to retain the car anymore. In that case, the lease company will give you some money in return. By the way, you do have an option to find a buyer on your own (in case you can find a better deal on your own). So, you are not forced to sell it back to TransLease.
- “Guaranteed Bonus” is something you will surely get.
- “Good Driving Bonus” looks a bit tricky. The company says it depends on how well you have driven the car and the market conditions at the time of completion of loan tenure. You are a risk taker there.
- “Buy the car” is how much you need to pay to TransLease and own the car beyond the loan period. Thereafter, you use the car and pay for insurance & maintenance on your own.
Points to Note
- The car is registered in your name. At the end of loan tenure, if you want to surrender the car, you will be guided on how to transfer the car to TransLease.
- In case of surrender, “Guaranteed Bonus” and “Good Drive Bonus” will be transferred to your account after deducting TDS. I am not very sure if this money is taxable. In my opinion, it should not be taxable.
- No claim bonus from the insurance company, if any, will be credited to your bank account after deducting TDS.
- Smart EMI also includes the insurance and maintenance for the full term. It includes both third party and zero depreciation own damage premium.
- As per each plan, you have a Kilometre allowance. Even though you can use the car as much as you want, there is a distance threshold above which you have to bear the charges for maintenance at actuals. For the 36-month plan (or repayment period), the SMART EMI product covers maintenance expenses for 50,000 km. For the 60-month plan, the maintenance expenses are covered for a distance of 75,000 kms. In fact, if you breach the threshold, the “Guaranteed Bonus” amount may be reduced. So, “Guaranteed Bonus” is not really guaranteed. Even the car EMI may be changed.
- In such arrangements, your power to negotiate the price for the car gets reduced. Even though there is an option to purchase the car from the preferred dealership, you have to refer the dealer to TranzLease and they take it forward from there. You wouldn’t expect them to negotiate as hard as possible.
- As per the website, the rate of interest shall be same as a regular car loan from ICICI Bank.
What Are the Pros?
ICICI Smart EMI is convenient. You do not have to worry about insurance and regular maintenance of the vehicle. Zero depreciation cover is relatively expensive too. Everything is taken care of. Do remember that even in zero depreciation policy, not all the expenses are covered by the insurance company. You will have to bear some costs at actuals. Moreover, the running costs (fuel etc) will have to be borne by you. If there is uncertainty about your city of stay, you can simply sign up for LifeStyle 36 plan, use the new car for 3 years and sell it back to the leasing company.
You can close the Smart EMI before the scheduled period of 3 or 5 years. In such cases, you will have 2 options.
- Buy the car: Pay the outstanding loan amount + Prepaid insurance + Arrears, if any
- Surrender the car: Surrender car to TZL. The difference between the outstanding loan amount and the market value of the car will have to be paid by you. Prepaid insurance shall be recovered as well. I don’t understand why.
What Are the Cons?
ICICI Smart EMI is complicated. There is a distance threshold above which you have to bear the maintenance charges. You can’t be sure of the “Good Driving Bonus”. I am sure there are a few other ancillary charges that are difficult to decipher from the information on the website.
Is Smart EMI Better Than a Regular Car Loan?
The choice is likely between convenience and complexity. Smart EMI Car Loan is convenient but quite complex. The comparison is provided on the Smart EMI website too but you can expect such comparison to be biased. The website does not mention the loan amounts or the interest rates. Moreover, the cost of insurance can vary. You may be able to get better deals on your own.
1. Let’s compare “Classic 60” option for the Maruti Swift Desire Zxi with a traditional car loan.
If you had taken a regular loan for 5 years, you would have taken the loan for Rs 8,65,728 – 1.88 lacs = Rs 6.78 lacs. I have kept the down payment same. The EMI for such a loan (at 10% p.a.) would be Rs 14,399. That is about Rs 2,400 less than the Classic 60 Smart EMI loan. That’s a saving of Rs 1.41 lacs over 5 years.
In addition, under Smart EMI, you would have to pay an additional Rs 1.23 lacs to own the car after 5 years. Total difference is Rs 2.64 lacs. Traditional or regular car loan is a big winner here.
Do note, with traditional car loan, you will have to pay for insurance and maintenance on your own. However, it is unlikely to cost as much as Rs 2.64 lacs.
2. Now, let’s compare “Classic 36” with the traditional car loan.
If you had taken a regular loan for 3 years, you would have taken the loan for Rs 8,65,728 – 1.88 lacs = Rs 6.78 lacs. I have kept the down payment same. The EMI for such a loan (at 10% p.a.) would be Rs 21,867. This is about Rs 3,000 more than the Smart Loan EMI. Over 3 years, you pay Rs 1.07 lacs more under the traditional loan. You will also have to pay for insurance and maintenance separately. However, to buy car after 3 years, you will have to pay Rs 3.1 lacs to TZL.
So, the comparison is between:
(Rs 3,000 per month extra for 36 months + Insurance and regular maintenance costs)
AND
Rs 3.1 lacs at the end of 5 years.
A traditional car loan will likely win here too.
You can try out these numbers for your preferred car too and see the difference.