Remember Lambretta scooters? You had to pay extra for seats since they were in the optional accessories list. And if you decided that it was time that you booked a car for yourself, you would have to wait a year or two before your Amby or Premier actually reached at your doorsteps. And with a better spectrum of cars to choose from, you have an even better spectrum to finance your buy. Of course, there are the dealers, manufacturers, easy carloans; all out there to make car-buying like a walk in the park. However, the biggest catalyst has to be Financial Organizations.
Now why would you want to avail of a loan rather than buy your wheels outright? Thank the low interest rate regime. Compared to rates in 1996, when interest on carloans was over 30 percent, the present rates are less than half of it. Over the last year or so organised finance penetration has increased. There is an vast expansion on operations to the smaller markets because there is a huge potential that is yet to be tapped. Interest rates are very attractive and this will surely bring in more customers. Commercial vehicles also has good in business.
The retail finance pie is expected to grow at 30 percent at the present interest rates. Interest on cars is in the range of 7.5 percent to about 10 percent. Industry sources feel that the interest rates are among the lowest as compared to other countries and that there is not much for further cuts. There may be a rise of 0.5- 0.75 percent in the future, but still it will be difficult to predict the exact movement.
"Repayment of loans across the industry has improved. This has been due to the increase in spending power of the buyers as well as lower interest rates." ICICI Bank has expanded its reach to cater to smaller cities and towns. The bank has planned a higher growth this fiscal and hopes to outpace the industry. State Bank of India (SBI), the other major player in this business is looking to better its previous year's growth of 38-40 percent. It is going all out to capture a larger share of the market.
What bankers are happy about is the new trend in car sales wherein the shift in customer preference for bigger cars has been distinct. Moreover, with new models being launched with greater frequency, the market response has been phenomenal. "Over the last year, the introduction of some new products like the Getz, the Indigo Marina and the Innova. But they have not quite managed to create a frenzy like the Swift did. The equation is simple: new products mean greater demand. And this suits the financiers well.
The spending power among those in the 26-35 age group has increased considerably. More so in centres where services businesses - especially IT and ITES - are very strong. Their preference is for cars priced over Rs 4 lakh, which is much higher considering the fact the largest selling; the Alto is priced a little over Rs 2 lakh. Also, many people are going for the B+ and C segment cars in the larger cities. This has resulted in a huge opportunity for the financiers, But will this trend continue for long? "Every trend will go through ups and downs. Today banks are able to lend at low interest rates because the economy is doing well. But if there is a slowdown then of course sales will be hit and FIs will be forced to hike their rates to tide over the rough times. What is significant though is that the financiers are aware of these situations given their global exposure. They will be able to cross subsidise some loans with others.
However, the present fiscal is expected bring about some changes in the customer preference due to fuel prices. Many banks have entered into tie-ups with leading manufacturers to provide finance to their products. The SBI-Maruti alliance was the one that started it all. Easily available and cheaper credit and increasing income levels have boosted the financing industry.
Amitab Singh was the proud owner of a ‘Santro Zing’ which He had purchased 9 months ago with the help of a loan. One evening he went out for dinner with his family, parking his car on the road. Much to his disheartenment, when he came back 2 hours later, his car had vanished. It had not been towed away as he had first assumed but, had been stolen. Luckily, he has comprehensive insurance coverage but, he is still at a loss as to what he should do next. If you too wish to know the same, then, read on… IMMEDIATE STEPS TO TAKE WHEN YOUR CAR IS STOLEN.
Go to the police station in the area from which your car has been stolen and lodge a First Information Report (FIR) within 24 hours of the theft. Make sure you keep a copy of the FIR. Next, intimate your car insurer about the theft. The insurer may depute an investigator to verify the facts and collect the necessary paperwork. If the original Registration Certificate (RC) book, driving license and insurance papers were in the car at the time of the theft and you do not have any copies with you, you will have to acquire their copies from the Regional Transport Office (RTO) and the insurance company. You also need to intimate the finance company from whom you have taken a loan about the theft and submit a copy of the FIR to them. LENGTHY PROCESS The theft of a car can lead you into a complicated legal tangle. Not only will it involve trips to the police station but you will also have to answer a series of questions by the insurance investigator till he is satisfied that the car is really stolen.
HOW MUCH INSURANCE WILL YOU GET? Though your car will be insured at its market value at the time of insuring it, claims will be settled at the Insured’s Declared Value (IDV). This value keeps on reducing on a yearly basis as it also accounts for the car depreciation (as per the schedule provided by the Indian Motor Tariff), besides the current market value of the car. The insurance amount that you will be eligible for will be this reduced depreciated value of the car. IF THE CAR IS UNDER A FINANCING SCHEME If the stolen car had been purchased on an auto loan which is still outstanding, then, in spite of the car being stolen you need to repay the loan. In fact, in such cases, the insurer will credit the claim amount directly to the financer since the car is hypothecated in its favour and therefore, the financer is the actual car owner. Further, since the insurer can take up to 6 months to settle the claim, you will be liable to continue to service the loan by paying the applicable Equated Monthly Instalments (EMIs) until then.
THE ACTUAL CLAIM Once the insurer has been able to ascertain the genuineness of the claim and the amount to be paid, the applicable sum will be given to you or your financer (as the case may be). Further, if the car is later traced, it will be returned to the insurance company. IN CASE OF ‘THIRD PARY COVER’ If you have skimped on insurance and taken only a third party cover then, you are not eligible to receive any sum from the insurance company as the scope of the cover does not include thefts. LAST WORD Even if you have opted for the comprehensive insurance policy, a theft will set you back financially. So, it always makes sense to take additional precautions while parking your car.
These are mere myths which do more hurt than good for a borrower in terms of the total cost paid on the loan. Following are some of the common myths on loans and how you can guard yourself against being bustle into them.
A FLOATING INTEREST RATE LOAN IS BETTER THAN A FIXED INTEREST RATE LOAN A drifting interest rate loan is one wherein the applicable interest rate moves in sync with the interest rate movements in the economy. In case of a fixed interest rate loan, the interest rate stiff stable during a part of or throughout the tenure of the loan. A floating interest rate loan is highly good every time there is a fall in the ‘benchmark’ interest rate, i.e. the rate to which the floating rate is linked. In case of most lenders, the Prime Lending Rate (PLR) is the ‘benchmark’ rate against which they link the interest rate on all their term deposits and loan merchandise. Whenever the PLR rises or falls, the floating interest rate mirrors a similar movement. However, in a rising interest rate authorities, a floating interest rate loan might result in a higher adoption cost. Since interest rates have become explosive and irregular in the recent times, it is imperative mood to study the interest rate movement instead of blindly believing that floating interest rate loans are better than fixed ones simply because the interest rate attached to them is more often than not lower by 50 to 100 basis points. For a shorter term of office loan (such as a car loan, personal loan, etc.) a fixed rate might do more justice, particularly in a scenario of intensify rates. Then again, be sure about your lender’s definition of ‘fixed rate’ as it may be ‘fixed’ for only a part of the tenure of the loan.
MY 10 PER CENT LOAN IS THE SAME AS YOURS Apart from the interest rate, the method of scheming interest plays an essential role in determining the total interest cost payable on the loan. Lenders generally make use of the reducing balance method for impose interest on loans. Under this mechanism, interest is computed on the ‘principal outstanding’ on the loan. The principal amount outstanding on the loan reduces with every Equated Monthly Instalment (EMI) that you pay and therefore, the more frequently the interest is calculated, the lower is the total interest burden that you have to bear. Lenders calculate the interest payable either on a monthly, quarterly, half-yearly or annual reducing basis. The interest outgo on a ‘reducing balance’ loan would be highest under the annual-rest and lowest under the monthly-rest method. In short, in spite of two lenders offering an identical rate of interest, the total financing cost may differ greatly depending upon the method adopted for interest calculations.
Today, anyone over the age of 21 can apply for a home loan. All that is needed is some margin money (a relatively small proportion of the cost of the home) and you can easily get a loan for the rest. In addition, interest rates on home loans are at single digit levels. And, to top it all, resident Indians are eligible for certain tax benefits, on the principal and interest components of a loan, under the Income Tax Act, 1961. So, it makes sense to use borrowed funds for your purchase, while you invest your own money elsewhere.
While taking a home loan, the most important element that you need to understand is how the EMIs are constructed.They comprise partly of the principal amount and partly of interest. Typically, in a housing loan, the principal repayment increases gradually, as the years go by. A bulk of the EMI, in the initial years, goes towards paying interest on the loan.
Less than a decade ago, home loans were available at prohibitive rates and the home loan market, which was at a fledgling stage, was fraught with rigidities. So, prepayment was the aim of most home loan users. Today, competition has ensured that loan seekers get the finest rates. Apart from that, the latest union budget has increased the deduction available on principal repayment of housing loans. Besides, the interest paid on a home loan is also eligible for deduction under section 24 of the Income Tax Act. Now, with low interest rates on housing loans, which get notionally reduced due to the tax benefits that accrue, the longer that a home owner can keep his loan going, the better. The law of inflation also suggests that prepaying your loan is not the best option, especially in the case of a fixed rate loan. However, if you have opted for a floating rate housing loan, you may want to prepay your loan, to avoid any uncertainty that could arise due to a rise in interest rates .
The home loan industry has been abuzz with activity. No other loan sector has witnessed such a phenomenal growth in the recent past. A booming real estate market, intense competition amongst the home loan lenders and higher disposable incomes of individuals has all led to a splurge in the home loan segment. However, factors such as globally rising interest rates, domestic inflation and a liquidity crunch have resulted in the hardening of interest rates. This has led home loan lenders to increase their lending rates by 1-2 per cent
TAX BENEFITS ON HOME LOANS
A home loan is repaid in the form of Equated Monthly Instalments (EMIs). This is a fixed amount payable each month to the lender. The EMI is made up of a portion of repayment of principal and payment of interest due. Both these components have tax benefits associated with them. Under Section 80 C of the Income Tax Act 1961, an amount of up to Rs 1 lakh can be claimed as deduction on the ‘principal’ portion of the total EMIs paid in a financial year. Under Section 24, a tax deduction of up to Rs 1.5 lakh is allowed per financial year on the interest paid on a home loan.
TAX HELPS REDUCE COST OF HOME LOAN
If you factor-in both these tax benefits, then the cost of availing a home loan even in today’s interest rate regime, is not expensive. Here is an example for clarification. Let’s assume that you have taken a home loan for Rs 8 lakh, for a term of 10 years at an interest rate of 10 per cent per annum on which the total EMI payable in the first year is Rs 1 lakh. This Rs 1 lakh constitutes both, the interest component and the principal repayment component. The interest component is Rs 80,000 (interest rate of 10 per cent x the loan amount of Rs 8 lakh) and the balance is the principal portion i.e. Rs 20,000. Both these amounts fall below the ceiling of the tax benefit available and are reduced from your taxable income. Therefore, the tax that you save assuming that you fall in the highest tax bracket of 33.66 per cent (30 per cent tax + 10 per cent surcharge + 2 per cent education cess) would be Rs 33,660 (tax rate of 33.66 per cent x Rs 1 lakh). In other words, the cost of your loan is Rs 46,340 (Rs 80,000 interest paid – Rs 33,660 tax saved) and the effective cost of your loan in the first year is 5.79 per cent (Rs 46,340 / Rs 8 lakh x 100). Clearly, the tax savings can substantially bring down the cost of a home loan.
IN CONCLUSION
Do not dismiss a home loan simply because the interest rates are showing an upward movement. Evaluate your options by understanding the tax implications and the actual cost of borrowing. The tremendous joy that you experience when you own a home can truly be enhanced, if the purchase of the home has been wisely planned.
for yourself, you would have to wait a year or two before your Amby or Premier actually reached at your doorsteps. And with a better spectrum of cars to choose from, you have an even better spectrum to finance your buy. Of course, there are the dealers, manufacturers, easy 
