Many of us purchase car on loans. Wouldn’t it help if you were to pay lower EMIs every month? Here are a few tips to reduce your car loan EMI burden.
1. Negotiate on the Price First, Then on the Loan Terms
You need to negotiate on the price of the car first. Loan interest rates and processing fee come next. Dealers enjoy good margin and have a lot of leeway in terms of margin. Visit at least 4-5 dealers and try to cut the best deal for you. If they are reluctant to offer discounts, try to get more and more accessories or services for free. For instance, you can ask for free leather seat covers or get rust painting, engine lamination done for free. Do note almost all the dealers are into car servicing business too (authorized service centers) and it is a much lucrative business, perhaps even more than the car dealership itself. You don’t negotiate on servicing costs, do you? Therefore, it does not cost them much to provide this add-on work such as Teflon coating, anti-rush painting etc. They will easily agree to provide all this for free.
Do not purchase car insurance from the dealer. The dealer will resist initially. However, if you put your foot down, he will agree eventually. You can buy the same cover from insurer website for much less. I saved about Rs 6,000 by purchasing insurance directly. Do not purchase any accessories from the dealer. Purchase from outside, which is a much cheaper option. These small savings can add up to a big amount. You will get all kinds of excuses. Stand firm and don’t hesitate to ask.
2. Loan Offers from NBFCs Launched by Car Manufacturers
Such NBFCs can offer really good loan deals and are certainly worth considering. However, if you start with the size of EMI on your mind, you may miss out on the discounts on the car. Salesperson will realize you are more worried about the affordability and cash flows. He/she will be less inclined to offer any discounts and freebies. Remember, EMI can be decreased by simply increasing the loan tenure. Therefore, when asked, do not mention that you want to take a loan. Mention that you will pay from own pocket. Negotiate the price and freebies first. Once the price is settled, move on to enquiring the loan terms. Do not negotiate the package (car price + loan terms).
3. Scout for the Lender Too
You don’t have to go with NBFC promoted by the car manufacturer. You can approach banks on your own to avail loans. You can check the interest rate range on many online sites such as BankBazaar and make an enquiry. If you are getting a better deal with the bank, go with that bank. If you have a good credit score and repayment ability, it will be much help in this case.
4. Negotiate the Processing Fee
For shorter term loans, the effect of a higher interest rate is not that pronounced. For instance, the difference between 10% and 10.5% car loan (Rs 5 lacs, 5 years) is only Rs 123 per month i.e. you pay an extra Rs 7,406 over 5 years. Now, if you have to pay a processing fee of Rs 5,000 (plus service tax), you can see the difference is almost equal to 0.5% of interest rate. Therefore, focus on the processing fee too. It should be easier to negotiate too. You may focus all your energy on getting a lower interest rate while a low hanging fruit such as processing fee misses your attention. Quite possible salesperson is aware of this. I believe getting discount or waiver of processing fee is more likely with a car manufacturer promoted NBFC because for them, it is a twin deal. A car sale and a loan. If you have already negotiated discounts with the dealer but are going to a bank to take the loan, you do not even have to reciprocate the favor done by the dealer. Negotiate hard.
5. Go for a Short Tenure
The longer you are around, the more interest you pay. Remember the cost of loan does not change. The absolute interest amount changes. Loan tenure for a car loan typically ranges from 3 to 7 years. If you can afford, go for the shorter tenure.
6. Pre-Payment Penalty
Since the car loan amount is not very high, there are chances that you may want to pre-pay the loan and save on interest cost. However, car loan agreements are likely to have pre-payment penalty clauses. I doubt you can negotiate on this front. Therefore, if you foresee the possibility of a pre-payment, choose your lender accordingly.
7. Don’t Be in a Hurry
Give yourself time. There is no need to go around flaunting your cheque book. Play the waiting game. The opposite party (dealers) play a waiting game too. They know you want to purchase a car. You know too that they need to make a sale. Many times, dealers will say “No” initially but will eventually relent to your demands or make a better counter offer. Remember, sometimes dealers take days or weeks to give you a better offer.
Conclusion
I am not in favour for taking loans for a depreciating asset such as a car. It is better to accumulate funds and purchase car outright. However, there can be many practical problems. Lack of quality public transport or cab-hailing services or illness/medical of a family member can force your hands and you may have to purchase car on loan. And if you plan to take a call, keep the aforementioned aspects in mind before going for a loan.
Ideally, you would want to:
- Pay a lower price
- Pay a lower interest rate
- Pay a lower processing fee
- Have a shorter loan tenure and lower prepayment charges
- Get more freebies.
You may not get lucky on all fronts. Try the best you can to get a better deal on some or all of these fronts.