Should You Go For Flexible Auto Loans?
Bombay: Auto makers like Maruti Suzuki India Ltd and Hyundai Motor India Ltd have partnered with lenders to offer flexible auto loans.
Instead of a regular car loan, the borrower can choose between a building program, a balloon system, and other loan structures.
Combine that with lower interest rates right now; flexible repayment options may appear attractive. According to data from Paisabazaar.com, borrowers can get new auto loans at interest rates as low as 7-7.5%.
The idea behind a different loan structure is to provide buyers with repayment flexibility based on their cash flow.
In one of the loan structures, the lender initially allows a low monthly equivalent payment (LMI), which increases over time. In another scheme, borrowers had to pay lower IMEs for the first six months, and then set higher IMEs later.
Besides the regular loan, where the borrower pays a fixed amount each month, all other flexible repayment programs have a cost. They are akin to a moratorium on a borrower availing himself of a loan.
When there is no payment or lower payment for a few months, interest is added to the principal and interest is charged. Therefore, the total outgo increases.
In the case of progress loans, the only advantage that borrowers get is that they can qualify for a larger loan amount. As the initial EMI is low, the borrower can get a larger loan. Borrowers pay lower EMIs in the early years, and in subsequent years repayment is accelerated.
These loans generally assume that the borrowers’ income will increase in the future. But because they charge a lower EMI, the spending on progressive home loans is also higher than regular loans.
Flexible loan structures are for borrowers facing a crisis due to the covid-19 pandemic. Opt for such loans only if you think your finances will be better in a few months. When in doubt, borrowers should avoid taking on new responsibility.
If you are buying a new car, if possible, negotiate a discount on the vehicle and finance it separately. In many cases, if you negotiate them together, you won’t get the best deal.
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