You may be wondering why we haven’t listed car loan interest rate in the above list of questions regarding car loan? That’s because many banks and car finance companies quote interest rates in a way so as to make them look low when they are not. They may quote flat rates or advance EMI rates.
- Ex-showroom price is the price of the car including excise duty but excluding local duties and statutory charges.
- On road price is the price you pay for the car including the ex-showroom price and cost of registration, insurance, octroi, municipal entry tax, road tax and any accessories. The on road price tends to be 15-25% more than the ex-showroom price and may vary from city to city.
Caution - Note that a car loan of 80% of on road price is likely to be more than 95% of ex showroom price.
- EMI in arrears scheme – this is the standard method of paying EMI where the interest for a month (and principal repayment) is payable at or after the end of the month.
- Advance EMI scheme – you pay interest and EMI at the beginning of the month. So, each month, you pay interest on amount that you have already repaid to the bank at the beginning of the month.
Caution – In case your bank charges EMI in advance, the EMI amount should be about 1% lower than that in case of EMI in arrears. For those interested in more precise figures, EMI per Rs. one lakh loan amount on a 60 month car loan at 10% rate of interest as per EMI in arrears method comes to Rs. 2125 while that as per EMI in advance method comes to Rs. 2107.
- Zero interest car loan scheme (also called 0% finance scheme) – this is one of those free lunches that actually doesn’t exist. So, beware of schemes that claim to offer zero interest. It is likely that the car company is offering a subvention scheme whereby the interest is paid by it to the bank upfront. Now, you could always ask the car dealer for the same amount as a cash discount. It’s like padding up the price of the car for the interest amount and marketing it under a nice name.
- Flat rate of interest car loan scheme – in this method, you pay interest on the entire principal amount of car loan till maturity. So, on a Rs. five lakh car loan at 10% for 5 years, you would have to pay back a total of Rs. five lakhs plus interest of Rs. 50,000 a year, that is a sum total of Rs. 750,000. The EMI in this case would be Rs. 12500.
- Reducing balance car loan scheme - in this method, you pay interest on the amount outstanding each month. With each EMI, the balance principal amount keeps reducing. So, on a Rs. five lakh loan at 10% for 5 years, you would have to pay back a total of Rs. five lakhs plus interest on reducing basis which comes to Rs. 137411 or Rs. 637411 including principal. The EMI in this case would be Rs. 10624, a good 15% less than that for a flat rate scheme.
Caution – Never get hoodwinked with the low rate of interest offered on a flat rate scheme. A flat rate of 10% is equal to an interest rate of 18.7% on reducing rate basis on a five year car loan.