Maruti Suzuki Ties up with Banks for Interesting Car Loan Schemes

The automobile industry has taken a severe beating during this lockdown. The manufacturers reported zero sales during the month of April, their worst month ever in terms of sales. However, from their point of view, not everything is negative news. Given the desire for social distancing, the commuters may avoid public transport and that may drive the sales of cars and two-wheelers once the lockdown is over.

The automobile manufacturers would not want to let this opportunity go waste. At the same time, the lockdown has affected the cashflows of many potential buyers. Hence, the affordability and the loan repayment ability of the buyers has come down.

Over the past few days, I have come across a few interesting car loan repayment structures, where the EMI burden of the borrower will be lower initially. Maruti Suzuki has tied up with ICICI Bank and HDFC Bank to offers such schemes. You can expect this to become a common feature across banks and car companies.

In this post, let us compare these schemes against a regular car loan.

Regular Car Loan EMI

You take a Rs 5 lac car loan for 5 years at 10% p.a. Your EMI will be Rs 10,623. You will have to repay the same EMI for the next 5 years. I assume that the interest rate does not change, and you do not prepay the loan.

Now, let us consider your monthly EMI under alternative loan repayment schedules. Nomenclature can be different, but the analysis will be similar.

Step-Up EMI

You pay a lower EMI (lower than a regular EMI) initially and EMI increases gradually over the years. An example could be: You start with a lower EMI and the EMI increases by 10% every year.

In this case, your EMI in the first year shall be Rs 8,896. Rs 9,754 in the second year. 10, 729 in the third year. Rs 11,802 in the fourth year. Rs 12,982 in the fifth year. I used Goal-seek function in Excel to find these values.

You can see the first year EMI of Rs 8,896 is about 17% less than the EMI under the regular loan (Rs 10,623). However, since there cannot be any free lunch, the fifth year EMI of Rs 12,982 is about 22% higher than the regular EMI.

In terms of cumulative payments, you will pay Rs 6.37 lacs under the regular car loan to close the loan. In the step-up EMI example discussed, you will have to pay Rs 6.49 lacs to close the loan. A difference of about Rs 12,000. Not much given the quantum of loan. Do note that the cost of the loan remains the same in both the cases.

By the way, if you are wondering whether the loan would get repaid with such a schedule of EMI, here is the proof.

Month	Principal O/S at the Beginning of the month	EMI	Interest	Principal repaid in the month	Principal O/s at the end of the month
1	5,00,000	8,867	4,167	4,700	4,95,300
2	4,95,300	8,867	4,127	4,739	4,90,560
3	4,90,560	8,867	4,088	4,779	4,85,781
4	4,85,781	8,867	4,048	4,819	4,80,963
5	4,80,963	8,867	4,008	4,859	4,76,104
6	4,76,104	8,867	3,968	4,899	4,71,204
7	4,71,204	8,867	3,927	4,940	4,66,264
8	4,66,264	8,867	3,886	4,981	4,61,283
9	4,61,283	8,867	3,844	5,023	4,56,260
10	4,56,260	8,867	3,802	5,065	4,51,195
11	4,51,195	8,867	3,760	5,107	4,46,088
12	4,46,088	8,867	3,717	5,150	4,40,939
13	4,40,939	9,754	3,674	6,079	4,34,859
14	4,34,859	9,754	3,624	6,130	4,28,730
15	4,28,730	9,754	3,573	6,181	4,22,549
16	4,22,549	9,754	3,521	6,232	4,16,316
17	4,16,316	9,754	3,469	6,284	4,10,032
18	4,10,032	9,754	3,417	6,337	4,03,695
19	4,03,695	9,754	3,364	6,389	3,97,306
20	3,97,306	9,754	3,311	6,443	3,90,863
21	3,90,863	9,754	3,257	6,496	3,84,367
22	3,84,367	9,754	3,203	6,551	3,77,816
23	3,77,816	9,754	3,148	6,605	3,71,211
24	3,71,211	9,754	3,093	6,660	3,64,551
25	3,64,551	10,729	3,038	7,691	3,56,860
26	3,56,860	10,729	2,974	7,755	3,49,105
27	3,49,105	10,729	2,909	7,820	3,41,285
28	3,41,285	10,729	2,844	7,885	3,33,400
29	3,33,400	10,729	2,778	7,951	3,25,449
30	3,25,449	10,729	2,712	8,017	3,17,432
31	3,17,432	10,729	2,645	8,084	3,09,349
32	3,09,349	10,729	2,578	8,151	3,01,198
33	3,01,198	10,729	2,510	8,219	2,92,979
34	2,92,979	10,729	2,441	8,287	2,84,691
35	2,84,691	10,729	2,372	8,357	2,76,335
36	2,76,335	10,729	2,303	8,426	2,67,908
37	2,67,908	11,802	2,233	9,569	2,58,339
38	2,58,339	11,802	2,153	9,649	2,48,690
39	2,48,690	11,802	2,072	9,729	2,38,961
40	2,38,961	11,802	1,991	9,811	2,29,150
41	2,29,150	11,802	1,910	9,892	2,19,258
42	2,19,258	11,802	1,827	9,975	2,09,283
43	2,09,283	11,802	1,744	10,058	1,99,225
44	1,99,225	11,802	1,660	10,142	1,89,083
45	1,89,083	11,802	1,576	10,226	1,78,857
46	1,78,857	11,802	1,490	10,311	1,68,546
47	1,68,546	11,802	1,405	10,397	1,58,149
48	1,58,149	11,802	1,318	10,484	1,47,665
49	1,47,665	12,982	1,231	11,752	1,35,913
50	1,35,913	12,982	1,133	11,849	1,24,064
51	1,24,064	12,982	1,034	11,948	1,12,115
52	1,12,115	12,982	934	12,048	1,00,068
53	1,00,068	12,982	834	12,148	87,919
54	87,919	12,982	733	12,249	75,670
55	75,670	12,982	631	12,351	63,319
56	63,319	12,982	528	12,454	50,864
57	50,864	12,982	424	12,558	38,306
58	38,306	12,982	319	12,663	25,643
59	25,643	12,982	214	12,768	12,875
60	12,875	12,982	107	12,875	-0

If your loan agreement provided for increase of 15% in EMI every year, the first year EMI would have been even lower at Rs 8,099 in the first year and Rs 14,166 in the fifth year.

Months	Regular EMI	10% Annual increase in EMI	15% Annual increase in EMI
First 12 months	10,624	8,867	8,100
12-24 months	10,624	9,754	9,315
24-36 months	10,624	10,729	10,712
37-48 months	10,624	11,802	12,319
49-60 months	10,624	12,982	14,166
Total Payment	6,37,411	6,49,602	6,55,337

Note that step-up EMIs can structured in different manners. I used an annual increment. The bank can use a quarterly or a six-monthly increment.

Balloon Payment EMI

The repayment schedule is such that you repay a certain portion of principal outstanding at the very end. Let us say you pay 1/4th of the principal outstanding at the very end. In the example discussed above, you will pay Rs 1.25 lacs at the very end. How will this affect your EMIs? The EMI will go down to Rs 9,009 for the entire 60 months. However, along with your last EMI, you will have to pay 1.25 lacs. Hence, the total payment for the loan shall be Rs 6.65 lacs.

Month	Principal O/S at the Beginning of the month	EMI	Interest	Principal repaid in the month	Principal O/s at the end of the month
1	5,00,000	9,009	4,167	4,843	4,95,157
2	4,95,157	9,009	4,126	4,883	4,90,274
3	4,90,274	9,009	4,086	4,924	4,85,351
4	4,85,351	9,009	4,045	4,965	4,80,386
5	4,80,386	9,009	4,003	5,006	4,75,380
6	4,75,380	9,009	3,961	5,048	4,70,332
7	4,70,332	9,009	3,919	5,090	4,65,242
8	4,65,242	9,009	3,877	5,132	4,60,110
9	4,60,110	9,009	3,834	5,175	4,54,935
10	4,54,935	9,009	3,791	5,218	4,49,717
11	4,49,717	9,009	3,748	5,262	4,44,455
12	4,44,455	9,009	3,704	5,306	4,39,149
13	4,39,149	9,009	3,660	5,350	4,33,800
14	4,33,800	9,009	3,615	5,394	4,28,405
15	4,28,405	9,009	3,570	5,439	4,22,966
16	4,22,966	9,009	3,525	5,485	4,17,482
17	4,17,482	9,009	3,479	5,530	4,11,951
18	4,11,951	9,009	3,433	5,576	4,06,375
19	4,06,375	9,009	3,386	5,623	4,00,752
20	4,00,752	9,009	3,340	5,670	3,95,082
21	3,95,082	9,009	3,292	5,717	3,89,365
22	3,89,365	9,009	3,245	5,765	3,83,601
23	3,83,601	9,009	3,197	5,813	3,77,788
24	3,77,788	9,009	3,148	5,861	3,71,927
25	3,71,927	9,009	3,099	5,910	3,66,017
26	3,66,017	9,009	3,050	5,959	3,60,058
27	3,60,058	9,009	3,000	6,009	3,54,049
28	3,54,049	9,009	2,950	6,059	3,47,990
29	3,47,990	9,009	2,900	6,109	3,41,881
30	3,41,881	9,009	2,849	6,160	3,35,721
31	3,35,721	9,009	2,798	6,212	3,29,509
32	3,29,509	9,009	2,746	6,263	3,23,246
33	3,23,246	9,009	2,694	6,316	3,16,930
34	3,16,930	9,009	2,641	6,368	3,10,562
35	3,10,562	9,009	2,588	6,421	3,04,140
36	3,04,140	9,009	2,535	6,475	2,97,666
37	2,97,666	9,009	2,481	6,529	2,91,137
38	2,91,137	9,009	2,426	6,583	2,84,554
39	2,84,554	9,009	2,371	6,638	2,77,916
40	2,77,916	9,009	2,316	6,693	2,71,222
41	2,71,222	9,009	2,260	6,749	2,64,473
42	2,64,473	9,009	2,204	6,805	2,57,668
43	2,57,668	9,009	2,147	6,862	2,50,806
44	2,50,806	9,009	2,090	6,919	2,43,886
45	2,43,886	9,009	2,032	6,977	2,36,910
46	2,36,910	9,009	1,974	7,035	2,29,874
47	2,29,874	9,009	1,916	7,094	2,22,781
48	2,22,781	9,009	1,857	7,153	2,15,628
49	2,15,628	9,009	1,797	7,212	2,08,416
50	2,08,416	9,009	1,737	7,273	2,01,143
51	2,01,143	9,009	1,676	7,333	1,93,810
52	1,93,810	9,009	1,615	7,394	1,86,416
53	1,86,416	9,009	1,553	7,456	1,78,960
54	1,78,960	9,009	1,491	7,518	1,71,442
55	1,71,442	9,009	1,429	7,581	1,63,861
56	1,63,861	9,009	1,366	7,644	1,56,218
57	1,56,218	9,009	1,302	7,707	1,48,510
58	1,48,510	9,009	1,238	7,772	1,40,738
59	1,40,738	9,009	1,173	7,836	1,32,902
60	1,32,902	9,009	1,108	1,32,902	–

By the way, you can also have a mix of balloon payment and step up EMI. A loan repayment can be structured in any manner if both the borrower and the lender agree to it.

Mix of Step-Up EMI and Balloon Repayment

10% increase every year. 25% of the loan to be repaid in the 60th month.

EMI would be — Rs 7,510 per month in the first year. Rs 8,272 in the second year. Rs 9,099 in the third year. Rs 10,009 in the fourth year. Rs 11,009 in the fifth year.

Total Payment of Rs 6.76 lacs to repay the loan.

Month	Principal O/S at the Beginning of the month	EMI	Interest	Principal repaid in the month	Principal O/s at the end of the month
1	5,00,000	7,520	4,167	3,353	4,96,647
2	4,96,647	7,520	4,139	3,381	4,93,266
3	4,93,266	7,520	4,111	3,409	4,89,857
4	4,89,857	7,520	4,082	3,437	4,86,420
5	4,86,420	7,520	4,053	3,466	4,82,953
6	4,82,953	7,520	4,025	3,495	4,79,458
7	4,79,458	7,520	3,995	3,524	4,75,934
8	4,75,934	7,520	3,966	3,554	4,72,381
9	4,72,381	7,520	3,937	3,583	4,68,798
10	4,68,798	7,520	3,907	3,613	4,65,185
11	4,65,185	7,520	3,877	3,643	4,61,542
12	4,61,542	7,520	3,846	3,673	4,57,868
13	4,57,868	8,272	3,816	4,456	4,53,412
14	4,53,412	8,272	3,778	4,493	4,48,919
15	4,48,919	8,272	3,741	4,531	4,44,388
16	4,44,388	8,272	3,703	4,568	4,39,820
17	4,39,820	8,272	3,665	4,606	4,35,214
18	4,35,214	8,272	3,627	4,645	4,30,569
19	4,30,569	8,272	3,588	4,684	4,25,885
20	4,25,885	8,272	3,549	4,723	4,21,163
21	4,21,163	8,272	3,510	4,762	4,16,401
22	4,16,401	8,272	3,470	4,802	4,11,599
23	4,11,599	8,272	3,430	4,842	4,06,758
24	4,06,758	8,272	3,390	4,882	4,01,876
25	4,01,876	9,099	3,349	5,750	3,96,126
26	3,96,126	9,099	3,301	5,798	3,90,328
27	3,90,328	9,099	3,253	5,846	3,84,482
28	3,84,482	9,099	3,204	5,895	3,78,588
29	3,78,588	9,099	3,155	5,944	3,72,644
30	3,72,644	9,099	3,105	5,993	3,66,650
31	3,66,650	9,099	3,055	6,043	3,60,607
32	3,60,607	9,099	3,005	6,094	3,54,513
33	3,54,513	9,099	2,954	6,144	3,48,369
34	3,48,369	9,099	2,903	6,196	3,42,173
35	3,42,173	9,099	2,851	6,247	3,35,926
36	3,35,926	9,099	2,799	6,299	3,29,627
37	3,29,627	10,009	2,747	7,262	3,22,365
38	3,22,365	10,009	2,686	7,322	3,15,043
39	3,15,043	10,009	2,625	7,383	3,07,659
40	3,07,659	10,009	2,564	7,445	3,00,215
41	3,00,215	10,009	2,502	7,507	2,92,708
42	2,92,708	10,009	2,439	7,569	2,85,138
43	2,85,138	10,009	2,376	7,632	2,77,506
44	2,77,506	10,009	2,313	7,696	2,69,810
45	2,69,810	10,009	2,248	7,760	2,62,050
46	2,62,050	10,009	2,184	7,825	2,54,225
47	2,54,225	10,009	2,119	7,890	2,46,335
48	2,46,335	10,009	2,053	7,956	2,38,379
49	2,38,379	11,009	1,986	9,023	2,29,356
50	2,29,356	11,009	1,911	9,098	2,20,258
51	2,20,258	11,009	1,835	9,174	2,11,084
52	2,11,084	11,009	1,759	9,250	2,01,833
53	2,01,833	11,009	1,682	9,328	1,92,506
54	1,92,506	11,009	1,604	9,405	1,83,101
55	1,83,101	11,009	1,526	9,484	1,73,617
56	1,73,617	11,009	1,447	9,563	1,64,054
57	1,64,054	11,009	1,367	9,642	1,54,412
58	1,54,412	11,009	1,287	9,723	1,44,689
59	1,44,689	11,009	1,206	9,804	1,34,885
60	1,34,885	11,009	1,124	1,34,885	0

Teaser Loan

Under this type of loan, you will have to make a low payment for a few months, say Rs 1000. Thereafter, the full EMI will resume. There could be fixed interest of say 5% for the first 6 months and thereafter a floating rate interest rate will apply. I am not sure if such structures will pass the regulatory test. Hence, I will not analyse this. If you come across such a deal, do your math well. The banks never give you a free lunch.

What Should You Do?

I see nothing wrong with these schemes per se. The cost of the loan remains the same under all the repayment schemes. As the loan mathematics works, if you pay lower EMI initially, the repayment of principal will be slower. Hence, you will have to pay more in cumulative terms.

At the same time, if you find that the interest rate for a regular car loan is lower than these special repayment schemes, you must work out the numbers to understand the difference.

Given how our minds work, your willingness/ability to negotiate a better deal for the car decreases if you focus only on the loan deal. It is not difficult to get lost in the financial mumbo-jumbo. A dealer may tell you about the loan deal first and you may not concentrate enough on the car deal. Hence, it is better to negotiate the car deal and the loan deal separately. The automobile manufacturers and the dealers are hard-pressed for sales during these times. You can use this leverage to get a good discount/deal. Negotiate well.

And yes, don’t overborrow. If you are opting for such a structure because the cashflows are very tight now and you expect things to get better soon, consider the possibility of things not improving so fast. You may not want to increase liability if there is uncertainty about your cash flows.