Buying a Car on Credit
.Working women in large cities are increasingly feeling the need for personal transport in the form of a two wheeler or a Car. Most of such purchases are made through Financing schemes based on her income.

Quite often, we are unable to clearly understand what would be the real cost of borrowing since the finance companies have their own system of presenting the cost. Many Financiers take advantage of the ignorance of the borrowers and charge an unreasonably high interest on the borrowings.

The cost of finance in a Hire Purchase transaction depends on the following elements.

1. The "Rate of Interest"

2. The "Down Payment"

3. Whether the "Tax" and "Interest" is payable in "Advance" or as and when they fall "Due"

4. "Service" and / or "Documentation" charges.

5. Whether the instalment is payable "At The Beginning" or "End" of the month.

6. Cost of "Pre-closure"

7. "Prompt-payment rebate" if any

8. "Overdue Charges"

9. "Tax incidence of "instalments" (in case of business entities.)

Let us briefly analyse the cost of a transaction when A Finance company charges an interest of 14 % p.a., a service charge of 2% of the amount financed, and the repayment is in 36 instalments payable in the beginning of every month. Let us presume that there is no prompt payment and pre closure charges, and the tax and insurance is paid as and when due .

It would be surprising to many to note that the real cost of funds borrowed in this transaction would be 27.5 % p.a. and not 14 % p.a. as many would first think.

There are many companies which collect the three year tax and insurance amount in advance and not pay any interest on them. This would further increase the cost. Similarly, there are clever companies who collect the margin money in the form of Deposit and pay interest at the rate of say 12-13 % p.a. applicable to Fixed Deposits while they treat the entire cost of the vehicle as amount advanced on which they collect interest at 27.5 % p.a. This will increase the real cost of borrowing significantly.

Prompt Payment Rebate is offered only by few companies and in their case the initial interest quote would appear to be high. Companies which donot pay Prompt payment rebate will be indirectly subsidising the irregular borrowers with regular Borrowers. Similarly, collection of instalments at the beginning of each month instead of at the end of a month makes a difference of nearly 1 % p.a. in interest. Foreign Banks charge special fees for premature closure or collect annual service charges. These are hidden costs which the borrower should take into consideration. Banks however quote interest on "Reducing Balance" method and not "Flat Rate system " adopted by Finance companies. These rates are comparable with the real cost of funds such as 27.5 % refered above and not the flat rate of 14 %.

Understanding the above cost elements will perhaps avoid you from being taken for a ride before you ride your dream vehicle.

Na.Vijayashankar

(naavi@vsnl.com)

 
.

 Index
Home
E-Mail