Everything you should know about car loans

Robert Baden-Powell founded the Boy Scouts movement in 1907 and coined its motto "Be Prepared"; which has served his legions of followers quite handsomely in the subsequent decades. In all his expeditions, a Boy Scout is seldom left unprepared in a contingency, armed as he is with useful tools and his training, all following the guiding advice of being prepared.

This can be applied when one is hunting for a car loan. With a wide range to choose from and advertisements promising luxury cars at EMIs barely exceeding their monthly grocery bills, a customer may truly feel he is, indeed, the king. However, even an ill-prepared king can end up losing his kingdom. Hence, it is always better to "know" before one enters the market, so as to get the best possible deal as well as overcome potential problems.

We have compiled a list of instructions and advice that will help you, the customer, to buy your dream car with the minimal of hassles while negotiating a loan. Here is some advice for not only negotiating with the bank, but also with the dealer.

1. First of all, decide on a few things before you embark on your loan-seeking journey

Do you want to buy a new car or a second-hand one?
Interest rates for a pre-owned car are much higher than for a new car, typically by around 300 basis points or 3 per cent. Also, for an old car, you will get a lower loan amount in proportion to the total cost (maximum 60 per cent) as compared to up to 80 per cent on a brand new car.

Which car do you specifically want to buy, and in what colour?
 Low-selling cars typically get a discount from the manufacturer and / or dealer. The same is true for certain slow-moving colours of even popular cars - a pink Zen Estilo.

When do you plan to buy this car?
The end of the year is usually a good time to buy as dealers are eager to clear their inventories for the fresh New Year's stock and may offer substantial discounts. The higher price for a January 2008 car is offset by the higher resale value vis-à-vis a December 2007 vehicle. So it's a balance between immediate gain and future pain.

What is the amount you are seeking as loan?
Fix the amount beforehand so that you can work towards an EMI you are comfortable with.

What is the duration of the loan you are looking for?
It is always advisable to go for the shortest duration possible. Not only are the interest rates lower for a 3-year loan vis-à-vis a 5-year loan, you also save money on interest and get out of debt earlier.

Do you want to opt for a fixed-rate or a floating-rate loan?
Although floating-rate loans have been introduced quite recently, it is advisable to go for a fixed-rate loan in the current scenario. (We will explain this further further in Should you opt for a fixed-rate or a floating-rate loan?

Do you want to go for a PSU bank or a private one?
Both of them have their pros and cons, explained in detail in Should you take a car loan from a PSU bank or a private one?

2. The second bit of advice is simple; it's also the most important - shop around
 If you intend to buy a mobile phone, you usually walk around the shops to get the best
 deal. Why not do the same for your car loan, especially since you don't have to exercise your feet, but only your hands and eyes to surf the net and make phone calls.
 Determine the best initial offer in terms of lowest EMI for a specific loan amount, and
 get ready for some more bargaining.

 A tip: You can leverage an existing relationship, like a salary account or credit card,
 with a bank, to negotiate a more favourable  deal.

3. Maintain a good repayment record, and have the documents to prove it
Although we still don't have well-established credit reporting agencies like Experian, Trans Union and Equifax as in the US, India does have a fledgling credit bureau and banks do share information on defaulters. So, the better your record, better are the chances of a good deal from the bank.

4. The fourth bit of advice, and the most time-consuming - negotiate
This negotiation can be approached as a three-step process.

a) Get the initial offer of the lowest EMI for a specific loan amount and duration, also called tenor. It's better to start negotiating near the end of the month when the banks and their agents have unmet targets looming.
b) Negotiate for a cash discount. This discount can be further subdivided under the following heads:
           i) Manufacturer's discount: Take the trouble to find out the latest news on this front
           ii) Dealer's discount: Haggle with the dealer; there's no shame in it, as he has a
               decent margin
          iii) Agent's discount: The agent gets a commission on the loan sanctioned; get him
                to pay a part back to you
          iv) Corporate discount: Employees of certain top companies are eligible for
                additional discounts; take the trouble to find out

Try to get as much of these as possible. The dealer or the loan agent (the dealer
himself may be the loan agent) may try to offset the cash discount by offering a lower
EMI. Instead of undertaking lengthy calculations to see if they keep their word, it's
better to insist on a cash discount, which may be adjusted against the down payment.

c) In the last stage of the negotiation process, try to get a few freebies like mud flaps, floor mats, etc, thrown in.

5. The fifth bit of advice deals with the insurance process
Go for comprehensive insurance and be sure to claim your no-claim bonus if you are eligible for it. You may get a discount if you opt for the insurance arm of the bank that extends you the loan.

6. As a final step, have everything down in writing but be sure to read the small print. Make liberal use of free resources like online calculators, experienced friends and discussion forums on the net to know exactly where you stand
Lastly, remember that this list is by no means exhaustive. You can never be too careful or too prepared, but failing to prepare means you are preparing to fail. With that cautionary note in mind, venture forth on the adventure of buying a car and getting a car loan. Happy driving!