There was a time when you paid a fat booking amount for a vehicle and got to drive it only 10-12 months later. Now you walk into a showroom and drive out in your car by paying just 5% of its price.

The two-wheeler and passenger car market is zooming. Easy finance is the octane powering that engine. In the past 12 months, an estimated four million Indians collectively borrowed close to Rs 45,000 crore to buy wheels for themselves.

In the socialist India of the 1970s and 1980s, buying a fourwheeler was a signal that one had arrived. It was an event that took place when an individual was around 40-plus and firmly entrenched in his job. Today, young people in their early 20s are buying cars. And it’s not as if they are blowing away their parents’ hardearned money.

 They are paying with their own money, even though many of them hold temporary contractual jobs. Delhi-based Vandana Guliani is only 23 years but she has already bought a car. She took a Rs 3 lakh loan for a Wagon R earlier this year. With the EMI of Rs 6,800 eating up almost a third of her take-home salary, this account executive with an advertisement agency exemplifies the new mindset of leveraging on tomorrow’s income to fulfill aspirations today.

Lenders are falling over each other to lure customers using all the tricks of the trade—attractive discounts schemes, freebies, low interest rates and fantastic exchange deals. The offers are as seductive as a wayward bahu in a television serial. Lots of bling that’s only coloured paste! Cash discount of Rs 35,000 with the car finance. Take a loan and the first year’s insurance comes free. There’s also a free music system on offer. And the interest rate? Why, of course it is the lowest in the market. If you are taken in by such smooth talk, be prepared for a rough ride ahead. 

The first checkpoint is the EMI. Don’t let the agent confuse you with a number soup of different rates of interest. Chances are that the “only” 9% rate of interest is a flat rate of interest, where the customer is charged an equal sum for the entire duration of the loan. A 9% flat rate translates into over 16% monthly reducing rate. To cut out the confusion, compare the EMI for every Rs 1 lakh being charged by various

FIVE SMART TIPS FOR AUTO LOAN CONSUMERS

Flat or reducing: Don’t be fooled by “only” 9% rate of interest. Chances are that it is a flat rate, which translates into over 16% monthly reducing rate.

Check EMI, not rate: Compare EMI offered by various banks per Rs 1 lakh for a similar period to zero in on the best deal.

100% finance, 0% benefit: Don’t fall into the trap of a bigger loan.A higher down payment reduces the EMI. Or shortens the period. Both ways you benefit.

Costly discounts: The cash discounts and freebies being offered.This discount will, in all probability, come out of your huge payout.

Prepayment clause: SBI and other P SU banks don’t slap a penalty on prepayment. But most private banks do, charging up to 2-4% of the amount being prepaid.

banks for the same tenure. The EMI will depend on how frequently the outstanding balance is reduced. This can be done in four broad time frames: daily, monthly, quarterly and yearly. The more frequently the outstanding balance is reduced, the better it is for the customer. In comparison, a quarterly or annual reduction means you continue paying interest on money that you have already repaid. The best deal is the daily reducing rate offered by public-sec tor banks.

Then there are delicious cash discounts waiting for you if you take a bigger loan. This too is  chimera. If you take a Rs 4 lakh loan for five years, your EMI would be close to Rs 8,300. Over five years you will pay some 98,000 as interest. So, guess where that Rs 35,000 cash discount is coming from? Why, out of the interest you will pay to the lending bank. Don’t fall into this trap. Try and make as high a down payment as your pocket allows and borrow the rest. By making a higher downpayment, you reduce the EMI. Or shorten the period. Both ways you benfit.

Another point to check in the car loan agreement is the prepayment clause. As incomes rise, borrowers find it easy to pay a bigger EMI or pay off a loan completely well before its tenure ends. Also, you need to close the loan if you are planning to sell the vehicle. While most PSU banks do not charge a penalty on prepayment of the loan, private banks do levy a 2-4% charge. It is okay if the foreclosure penalty is 2% of the outstandingamount. Anything higher may make the foreclosure unfeasible.