The Hindu Business Line : How to finance a car purchase

NEXT to a house, owning a car is probably uppermost on the wish list of most middle- and upper-class households. New cars are flooding the market, with variants to suit every segment.

The auto boom has been catalysed by cheaper finance. The interest rate on car loans, which was 14-15 per cent five years ago, has now dropped by half. The auto sector has essentially become a buyer's market.

The market players: The auto finance market is estimated to be Rs 40,000 crore and growing at 15-17 per cent. This market is dominated by private banks such as ICICI Bank and HDFC Bank. Leading the pack among the public sector banks are SBI and its subsidiaries. Citibank and HSBC mainly represent the MNC banks. Vehicle manufactures such as Ford and Bajaj Auto also provide finance schemes through their group companies . Private and MNC banks are giving small-time private financiers, who dominated the auto-finance market in the 1990s, a run for their money.

NBFCs such as Sundaram Finance and GE Countrywide are also players in this market. Maruti Udyog, for instance, besides having tie-ups with SBI and its subsidiaries, has joint ventures with GE Countrywide and Citibank.

Getting started: Applying for vehicle loans has become far easier. In most cases, all you need to do is browse the Web sites or dial a toll free. Customers may also visit the nearest branch of the financier or walk into any of the showrooms.

Eligibility criteria: Age and income are the core among the eligibility criteria. While the lower age limit set by almost all lenders is 21 for borrowers, the upper age limit varies from financier to financier. While the two larger players in the vehicle finance market — ICICI Bank and HDFC Bank — have fixed the upper age limit at 65 (58 in the case of salaried individuals) on maturity of the loan. SBI's upper age limit is 65 at the time of taking the loan for both salaried and self-employed individuals. The age factor apart, banks such as HDFC require an applicant to have been in employment for at least two years, of which a minimum of one year should have been with the current employer.

ICICI Bank and HDFC Bank offer easier terms on the income criteria to the self-employed vis-à-vis the salaried. This apparently is to take into consideration non-cash expenses incurred by businessmen. SBI, however, does not differentiate between the two classes. To get a loan from SBI one must have a net annual income in excess of Rs 75,000. For residents in the four metros and Pune and Bangalore, the minimum gross income to get a two-wheeler loan from HDFC Bank is Rs 54,000 and for those in other cities, it is Rs 42,000. HDFC Bank also requires the borrower to have a landline telephone instrument at his residence.

Documentation: Documentation has been made as hassle-free as possible withproof requirements reduced to the minimum. The standard documents required for getting vehicle loans include proofs of identity, address and income. Salaried individuals are required to produce latest pay-slips or Form 16; some financiers insist on both. In the case of self-employed, the latest income-tax return would suffice for income proof. While most financiers do not ask for bank statements, SBI and a few others do so. Loan terms: Most banks that offer car loans finance almost any car available in the market. Most of them have tie-ups with certain manufacturers and offer better terms on these cars.

Most financiers offer up to 90 per cent of the ex-showroom price of the car. SBI has gone a step further to include registration fee, road tax and insurance premium in the eligible loan amount. Applicants can avail themselves of up to 100 per cent of the invoice value from HDFC Bank on a fixed deposit lien. HDFC Bank offers loans up to 85 per cent of the invoice value on two-wheelers. One can drive out a Maruti 800 on a down payment of about Rs 20,000 (excluding insurance and registration charges) and a two-wheeler for about Rs 3,000.

Interest rate: For small cars, the interest generally is 9.5-10 per cent on a reducing balance basis. HDFC Bank charges 7.5-10 per cent for new cars and 12-16 percent for two-wheelers, depending on the make and model of the vehicle. HDFC offers preferential pricing to its existing customers, which include lower rates of interest, minimum documentation and processing time.

Tenure: The tenure of a typical car loan ranges between from a minimum of 12 months to a maximum of 84 months. Among the larger lenders, HDFC Bank offers repayment options of up to 60 months for used-car loans. In the case of two-wheelers, the maximum tenure is 36-48 months.

Repayments/prepayments: Typically, repayments are made by way of post-dated cheques. ICICI Bank and HDFC Bank also offer direct debit mandates to their accountholders. A borrower who gets a cash windfall or taken a conservative view on his ability to make timely payments may use the prepayment facility.

Normally, a borrower can use this facility on expiry of six months. ICICI Bank offers this facility for a 5 per cent fee on the outstanding principal amount, other financiers charge 4-5 per cent. Most financiers, however, do not accept part-prepayment of the principal. HDFC charges a pre-payment fee on the basis of its policy at the time of pre-payment if it is within 12 months of taking the loan.

Response time: The average processing time is 1-3 working days from the receipt of all documentation. The turnaround time on average at HDFC Bank is 48 hours.

Other products: ICICI Bank, HDFC Bank and ABN Amro offer some novel car mortgage products. Under this facility, a person can offer his car as security and get loans on similar lines as overdraft facilities offered to commercial establishments. Interest is charged on the amount utilised. ICICI Bank offers an overdraft limit up to 90 per cent of the assessed value of the car.

The eligibility criteria and the documentation are almost the same as for car loans. ICICI Bank charges a fee for the assessment.

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