Flexible options come at a price
The more the borrower defers principal repayment, higher is his interest cost
The more the borrower defers principal repayment, higher is his interest cost, writes BINDISHA SARANG
Maruti Suzuki India Limited (MSIL) has partnered with banks like ICICI and HDFC to offer a variety of loan repayment options to new car buyers in the country. These schemes could provide just the nudge that buyers need amid the resource crunch they are facing in the midst of the Covid-19 lockdown. Says Shashank Srivastava, executive director (M&S), Maruti Suzuki India: “New car buyers can select from a host of schemes offering low down payment options and low equated monthly instalments (EMIS). These schemes will particularly help customers in the entrylevel segments.” If you are looking to take a car loan and want some flexibility in repaying the EMI, read on.
With social distancing becoming a necessity, many people now want to avoid public transport, and even taxis and cab aggregators, and will rather buy their own car. But prospective buyers are also not sure if they should take on a fresh liability, given the uncertainty around jobs. Says Raj Khosla, founder and managing director, Mymoneymantra.com: “With people facing an unprecedented cash crunch due to the pandemic and subsequent lockdowns, opting for a car loan will be more than a purely emotional decision, especially for first-timers. Customers are seeking real-time payment relief.”
ICICI Bank and HDFC Bank are offering three options: Flexi EMI, Balloon EMI, and Step-up EMI Scheme.
Flexi EMI scheme: It comes with the option to choose low EMIS for three months every year throughout the tenor of the loan. The EMI can be as low as ~899 for the first three months on a loan amount of ~1 lakh. After that, it is higher. Says Khosla: “Flexi EMIS are suitable for self-employed people or those with irregular monthly incomes, as it allows flexibility to repay loans in tandem with undulating cash flows.”
As the name suggests, this loan scheme can provide borrowers with a lot of flexibility. Says Anuj Kacker, cofounder, Moneytap: “Borrowers can choose the EMI tenor that they find convenient. They can also reduce their interest and EMI burden by pre-paying the loan. No charges have to be paid on prepayment of the loan.” All this leeway, he adds, makes it easier for borrowers to manage their financial problems.
The risk in this option, according to Kacker, is that a borrower could get trapped in a longer debt cycle and EMI tenor. If a borrower’s current loan continues for a longer tenor, that restricts his eligibility for a new loan.
Step-up: The EMIS in a step-up loan, as the name suggests, increase at regular intervals. “Anyone who is seeking temporary cash relief and wants to increase his EMI load gradually should go for this type of loan. It is also ideal for young borrowers who have just started their careers,” says Khosla. Customers can increase their EMI amount by up to 10 per cent every year, in tandem with the increase in their income.
In the case of ICICI Bank, the EMI can start from ~1,752 per lakh in the first year of repayment and increase progressively by 10 per cent every year for a tenor of five years. In the case of HDFC Bank, the initial EMI can be as low as ~1,111 per lakh for a loan tenor of 84 months.
Borrowers need to make a financially informed decision while applying for this loan. Says Kacker: “If you want to control your EMIS, then choose a fixed interest rate for this type of loan rather than a floating rate.”
The risk in this repayment option, according to Kacker, lies in the fact that if the borrower ’s financial condition does not improve significantly, he may find the higher EMIS, which have to be paid at the later stages, to be beyond his ability.
Balloon EMI scheme: This loan option is shaped like a balloon. EMIS are low throughout the loan tenor, but the final payment is massive. In this scheme, as offered by ICICI, the EMI per lakh can be as low as ~1,797 throughout the tenor, barring the last instalment where the borrower pays one-fourth of the principal. Says Khosla: “It is ideal for anyone who doesn’t possess the cash for making a down payment and would prefer to service low EMIS for a few years.” In short, if you want to enhance your eligibility, and are anticipating a spike in your earnings in later years, this loan option can work for you. Qualifying for this option is easier than for others.
However, this loan type carries a high risk. Says Kacker: “The risk of non-repayment is higher here. It can happen that when the maturity date arrives, the borrower may be in financial trouble and may not have the money to pay the final settlement amount.”
Pay heed to total cost of loan: While these loan options do provide greater flexibility to borrowers, the latter also need to think of the total interest cost they will incur on them. Says Adhil Shetty, chief executive officer, Bankbazaar: “Compared to a regular auto loan, step-up and balloon loans can both be more expensive (see box).” Remember that this is the price you pay for not deferring your car purchase.
Finally, the borrower should also pay heed to the interest rate he is being charged on these loans and try to get the best deal for yourself. Just because these banks are offering these convenient repayment options, it doesn’t mean the borrower should not scout around for better rates. There’s a possibility that your bank, too, may offer you such repayment options, especially the balloon option. Says Shetty: “A balloon option is especially useful if you can make a prepayment in a few years.”
Finally, don’t forget to negotiate for a discount on the price of your vehicle. Remember, in an economy that is in doldrums, it’s a buyer’s market out there, even if the buyer’s own finances are not in too good a shape.