Car Loan Finance

June 29, 2010Car Financeby EconomyWatch


Car Loan Finance is the process where Finance Companies offer loans to buy cars. Nowadays, it is quite easy to get an automobile loan. It is the age of organized and institutional Car Finance. There are many innovative and tempting offers given by the Car Finance Companies to the Customers for implementing aggressive marketing of Car Finance Schemes.

The various schemes that are available for Car Loan Finance are:

  • Margin Money Schemes
  • Security Deposit Schemes
  • Hire Purchase & Lease EMI
  • Advance EMI Schemes
  • Processing Fees
  • DSA/DMAs Vs Dealer

Car Loan Finance can be taken either singly or jointly, if there are more than one persons looking for Car Finance. When more than one persons seek Car Finance, they are called co-applicants. In general, a Guarantor is not required when you are going for a Car Loan Finance, but if your income is below the credit criteria, then you may require a Guarantor for your loan.

If you want to avail a car loan, the various costs that you have to pay to the Finance Company are:

Interest cost, it is charged by the Finance Company to provide finance.

Processing Fees, this is a one time charge which is taken for the purpose of legal paperwork and processing. The range is 2-3 percent of the loan and it should be paid as an upfront payment to the company.

There are two methods of calculating interest, one is the Reducing Balance Method and the other is the Flat Rate Method. In the Reducing Balance Method (also known as Written Down Value System), the interest is calculated on the balance of the loan which is outstanding. The Flat Rate system refers to the calculation of interest on the total amount over the entire loan and principal duration and in this case, the interest is divided equally with the number of installments.

When you are going to buy a car, some requirement of security is there. These are:

  1. Hypothecation of the car
  2. Registration of the hypothecation charge in the RTO (Regional Transport Office) Books.
  3. A third party guarantee or Guarantee of Spouse if she is employed.

Time Duration or Tenure of the LoanThe time period in which the Customer has to repay the loan to the Finance Company is called the Tenure. The Customer has a choice to repay the loan. The options are available from 1-7 years, depending on your capacity to repay the loan.

EMI (Equated Monthly Installments)An EMI comprises of a part of the Principal and the interest, and it is a method of repaying the loan. The amount of EMI is dependent on three factors: the loan term, the rate of interest, and the amount of the loan.

Sometimes, the Manufacturers and Dealers provide some benefits to the Customer which includes giving Discount to the Customer. This Discount is shared among the Manufacturer, the Dealer, and the Finance Companies.

Registration amount and InsuranceFor an individual, the Registration amount is 3.5% of the showroom price of the car. For a company, it is 10.5% of the showroom price of the car. Insurance rate applicable for both individuals and companies is at a flat rate of 3.6% of the showroom price of the car for both companies and individuals.

The Conditions that are applicable in the Financing Agreement between the Finance Company and the Individual are:

The entire risk of non-performance is accepted by the Hirer.
The benefits of warranties that are provided by the supplier or Manufacturer of the Vehicle should always go to the Hirer.

The Vehicle shall be insured by the Hirer and he should forward the insurance copies regularly to the Finance Company every year.

In order to indemnify the Finance Company against all duties, taxes, fees, and any other outstanding payables regarding the Vehicle, all such payments must be paid by the Hirer.The Hirer has to maintain the Vehicle in serviceable and good condition.To allow the Finance Company for inspection of the Vehicle anytime when it is needed. Change of possession of the Vehicle cannot be allowed in terms of mortgaging, selling, assigning, encumbering or any other way if permission is not taken from the Finance Company.

In case of default, the options open for the Finance Company are:

It may be demanded by the Finance Company that the Vehicle is returned to the company. Immediate possession can be taken by the authorized official recruited by the Finance Company by entering the premises where the Vehicle is kept.

After giving a notice to the Hirer, the Finance Company has the options of selling, hiring, or using the Vehicle. If the Vehicle is resold, the Hirer has to pay for the deficiency in case there is a shortfall. The Hirer also has to pay for any damages caused to the Vehicle.

The documents that are required in the agreement between the Hirer and the Finance Company are:

  1. Hire Purchase Agreement
  2. Schedule of Charges, Deposits, and Rates
  3. Irrevocable Power of Attorney
  4. Promissory Note
  5. Form 20 for Vehicle Registration
  6. Certificate of Inspection
  7. Form 26 for Intimation of Loss or Destruction of Certificate of Registration and application of- duplicate certificate
  8. Form 27 for assignment of new Registration mark on transfer of the Vehicle to another state.
  9. Form 28 for “NO OBJECTION CERTIFICATE” and grant of certificate.
  10. Form 29 Form of Notice to Transfer of Ownership of a Vehicle.
  11. Form 30 report of Transfer of Ownership of a Vehicle.
  12. Form 34 Application for making an entry of an agreement of Hire Purchase/Lease/Hypothecation subsequent to Registration.
  13. Form 35 Notice of Termination of an agreement of Hire Purchase/Lease/Hypothecation Dealer Authorization Letter.
  14. Signature verification
  15. Disbursement Memo
  16. Checklist

How Can You Get Your Vehicle Financed?

1.BanksA Bank is the most easiest source to get a Car Loan Finance. If there is an acquaintance with the Bank, it is viable. Some other Finance Companies are providing better service than Banks. Processing paperwork takes longer time in case of Banks.

2. Non-Banking Financial Companies (NBFCs)The Dealers and Manufacturers have a tie-up with this type of companies. These are popular because of their promptness, though people should be cautious about things like Dealer Discounts in which case the financiers claim that better Discounts are available from the Dealer if the Vehicle is financed from them by the buyer. This may be fraudulent because there might be a financier-Dealer nexus.

The scenario of Car Loan Finance in India is quite eminent. Various Banking as well as Non-Banking Financial Companies are offering Car Loan Finance such as CitiBank, HDFC Bank, ICICI Bank, Maruti Finance, Saraswat Bank, SBI Car Loans, and Sundaram Finance etc.

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