Maruti Suzuki Ties up with Banks for Interesting Car Loan Schemes

maruti suzukiThe 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.

MonthPrincipal O/S at the Beginning of the monthEMIInterestPrincipal repaid in the monthPrincipal O/s at the end of the month
15,00,0008,8674,1674,7004,95,300
24,95,3008,8674,1274,7394,90,560
34,90,5608,8674,0884,7794,85,781
44,85,7818,8674,0484,8194,80,963
54,80,9638,8674,0084,8594,76,104
64,76,1048,8673,9684,8994,71,204
74,71,2048,8673,9274,9404,66,264
84,66,2648,8673,8864,9814,61,283
94,61,2838,8673,8445,0234,56,260
104,56,2608,8673,8025,0654,51,195
114,51,1958,8673,7605,1074,46,088
124,46,0888,8673,7175,1504,40,939
134,40,9399,7543,6746,0794,34,859
144,34,8599,7543,6246,1304,28,730
154,28,7309,7543,5736,1814,22,549
164,22,5499,7543,5216,2324,16,316
174,16,3169,7543,4696,2844,10,032
184,10,0329,7543,4176,3374,03,695
194,03,6959,7543,3646,3893,97,306
203,97,3069,7543,3116,4433,90,863
213,90,8639,7543,2576,4963,84,367
223,84,3679,7543,2036,5513,77,816
233,77,8169,7543,1486,6053,71,211
243,71,2119,7543,0936,6603,64,551
253,64,55110,7293,0387,6913,56,860
263,56,86010,7292,9747,7553,49,105
273,49,10510,7292,9097,8203,41,285
283,41,28510,7292,8447,8853,33,400
293,33,40010,7292,7787,9513,25,449
303,25,44910,7292,7128,0173,17,432
313,17,43210,7292,6458,0843,09,349
323,09,34910,7292,5788,1513,01,198
333,01,19810,7292,5108,2192,92,979
342,92,97910,7292,4418,2872,84,691
352,84,69110,7292,3728,3572,76,335
362,76,33510,7292,3038,4262,67,908
372,67,90811,8022,2339,5692,58,339
382,58,33911,8022,1539,6492,48,690
392,48,69011,8022,0729,7292,38,961
402,38,96111,8021,9919,8112,29,150
412,29,15011,8021,9109,8922,19,258
422,19,25811,8021,8279,9752,09,283
432,09,28311,8021,74410,0581,99,225
441,99,22511,8021,66010,1421,89,083
451,89,08311,8021,57610,2261,78,857
461,78,85711,8021,49010,3111,68,546
471,68,54611,8021,40510,3971,58,149
481,58,14911,8021,31810,4841,47,665
491,47,66512,9821,23111,7521,35,913
501,35,91312,9821,13311,8491,24,064
511,24,06412,9821,03411,9481,12,115
521,12,11512,98293412,0481,00,068
531,00,06812,98283412,14887,919
5487,91912,98273312,24975,670
5575,67012,98263112,35163,319
5663,31912,98252812,45450,864
5750,86412,98242412,55838,306
5838,30612,98231912,66325,643
5925,64312,98221412,76812,875
6012,87512,98210712,875-0

 

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.

MonthsRegular EMI10% Annual increase in EMI15% Annual increase in EMI
First 12 months10,6248,8678,100
12-24 months10,6249,7549,315
24-36 months10,62410,72910,712
37-48 months10,62411,80212,319
49-60 months10,62412,98214,166
Total Payment6,37,4116,49,6026,55,337

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.

MonthPrincipal O/S at the Beginning of the monthEMIInterestPrincipal repaid in the monthPrincipal O/s at the end of the month
15,00,0009,0094,1674,8434,95,157
24,95,1579,0094,1264,8834,90,274
34,90,2749,0094,0864,9244,85,351
44,85,3519,0094,0454,9654,80,386
54,80,3869,0094,0035,0064,75,380
64,75,3809,0093,9615,0484,70,332
74,70,3329,0093,9195,0904,65,242
84,65,2429,0093,8775,1324,60,110
94,60,1109,0093,8345,1754,54,935
104,54,9359,0093,7915,2184,49,717
114,49,7179,0093,7485,2624,44,455
124,44,4559,0093,7045,3064,39,149
134,39,1499,0093,6605,3504,33,800
144,33,8009,0093,6155,3944,28,405
154,28,4059,0093,5705,4394,22,966
164,22,9669,0093,5255,4854,17,482
174,17,4829,0093,4795,5304,11,951
184,11,9519,0093,4335,5764,06,375
194,06,3759,0093,3865,6234,00,752
204,00,7529,0093,3405,6703,95,082
213,95,0829,0093,2925,7173,89,365
223,89,3659,0093,2455,7653,83,601
233,83,6019,0093,1975,8133,77,788
243,77,7889,0093,1485,8613,71,927
253,71,9279,0093,0995,9103,66,017
263,66,0179,0093,0505,9593,60,058
273,60,0589,0093,0006,0093,54,049
283,54,0499,0092,9506,0593,47,990
293,47,9909,0092,9006,1093,41,881
303,41,8819,0092,8496,1603,35,721
313,35,7219,0092,7986,2123,29,509
323,29,5099,0092,7466,2633,23,246
333,23,2469,0092,6946,3163,16,930
343,16,9309,0092,6416,3683,10,562
353,10,5629,0092,5886,4213,04,140
363,04,1409,0092,5356,4752,97,666
372,97,6669,0092,4816,5292,91,137
382,91,1379,0092,4266,5832,84,554
392,84,5549,0092,3716,6382,77,916
402,77,9169,0092,3166,6932,71,222
412,71,2229,0092,2606,7492,64,473
422,64,4739,0092,2046,8052,57,668
432,57,6689,0092,1476,8622,50,806
442,50,8069,0092,0906,9192,43,886
452,43,8869,0092,0326,9772,36,910
462,36,9109,0091,9747,0352,29,874
472,29,8749,0091,9167,0942,22,781
482,22,7819,0091,8577,1532,15,628
492,15,6289,0091,7977,2122,08,416
502,08,4169,0091,7377,2732,01,143
512,01,1439,0091,6767,3331,93,810
521,93,8109,0091,6157,3941,86,416
531,86,4169,0091,5537,4561,78,960
541,78,9609,0091,4917,5181,71,442
551,71,4429,0091,4297,5811,63,861
561,63,8619,0091,3667,6441,56,218
571,56,2189,0091,3027,7071,48,510
581,48,5109,0091,2387,7721,40,738
591,40,7389,0091,1737,8361,32,902
601,32,9029,0091,1081,32,902

 

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.

MonthPrincipal O/S at the Beginning of the monthEMIInterestPrincipal repaid in the monthPrincipal O/s at the end of the month
15,00,0007,5204,1673,3534,96,647
24,96,6477,5204,1393,3814,93,266
34,93,2667,5204,1113,4094,89,857
44,89,8577,5204,0823,4374,86,420
54,86,4207,5204,0533,4664,82,953
64,82,9537,5204,0253,4954,79,458
74,79,4587,5203,9953,5244,75,934
84,75,9347,5203,9663,5544,72,381
94,72,3817,5203,9373,5834,68,798
104,68,7987,5203,9073,6134,65,185
114,65,1857,5203,8773,6434,61,542
124,61,5427,5203,8463,6734,57,868
134,57,8688,2723,8164,4564,53,412
144,53,4128,2723,7784,4934,48,919
154,48,9198,2723,7414,5314,44,388
164,44,3888,2723,7034,5684,39,820
174,39,8208,2723,6654,6064,35,214
184,35,2148,2723,6274,6454,30,569
194,30,5698,2723,5884,6844,25,885
204,25,8858,2723,5494,7234,21,163
214,21,1638,2723,5104,7624,16,401
224,16,4018,2723,4704,8024,11,599
234,11,5998,2723,4304,8424,06,758
244,06,7588,2723,3904,8824,01,876
254,01,8769,0993,3495,7503,96,126
263,96,1269,0993,3015,7983,90,328
273,90,3289,0993,2535,8463,84,482
283,84,4829,0993,2045,8953,78,588
293,78,5889,0993,1555,9443,72,644
303,72,6449,0993,1055,9933,66,650
313,66,6509,0993,0556,0433,60,607
323,60,6079,0993,0056,0943,54,513
333,54,5139,0992,9546,1443,48,369
343,48,3699,0992,9036,1963,42,173
353,42,1739,0992,8516,2473,35,926
363,35,9269,0992,7996,2993,29,627
373,29,62710,0092,7477,2623,22,365
383,22,36510,0092,6867,3223,15,043
393,15,04310,0092,6257,3833,07,659
403,07,65910,0092,5647,4453,00,215
413,00,21510,0092,5027,5072,92,708
422,92,70810,0092,4397,5692,85,138
432,85,13810,0092,3767,6322,77,506
442,77,50610,0092,3137,6962,69,810
452,69,81010,0092,2487,7602,62,050
462,62,05010,0092,1847,8252,54,225
472,54,22510,0092,1197,8902,46,335
482,46,33510,0092,0537,9562,38,379
492,38,37911,0091,9869,0232,29,356
502,29,35611,0091,9119,0982,20,258
512,20,25811,0091,8359,1742,11,084
522,11,08411,0091,7599,2502,01,833
532,01,83311,0091,6829,3281,92,506
541,92,50611,0091,6049,4051,83,101
551,83,10111,0091,5269,4841,73,617
561,73,61711,0091,4479,5631,64,054
571,64,05411,0091,3679,6421,54,412
581,54,41211,0091,2879,7231,44,689
591,44,68911,0091,2069,8041,34,885
601,34,88511,0091,1241,34,8850

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.

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