Consumer Finance Tips. What You Should Know.

Consumer finance is defined as "lending of loans to individuals for purchase of consumer durables for their personal or household consumption purposes". The great advantage of CF (consumer finance) is that it enhances the mobility of people towards costly as well as the not so costly products on a scheme of "Buy Now and Pay Later" to be repaid in equal monthly installments (EMI). This facilitates to satisfy needs such as electronic goods, automobiles, real estate, etc. These examples have become a dire necessity of life. In this fast changing scenario of urbanization the necessities of households are increasing and income is still limited.

In this situation, an individual or household are attracted towards financing options. Instead of paying the entire amount upfront, you can purchase one product without paying the full amount at one time. For example, if you are going to purchase a peice of real estate for $100,000.00 and select the CF option, then you can usually make a small down payment in advance (1-10%) and the rest you can pay in EMI along with interest for a particular period of time. Some lenders may offer the option of zero percent financing to entice a consumer.

When a consumer decides to employ CF options for a purchase, the following questions should come to mind:

• Am I paying a competitve rate on the interest?
• Am I being over charged for a consumption loan?
• Do I really need to borrow for this purchase or is this an impluse purchase?

Features of a Consumer Credit Transaction

The salient features of consumer credit transactions are as follows: NUMBER OF PARTIES TO THE TRANSACTION: The transaction can be either a bipartite one involving the dealer-cum-financier and the borrower/customer or a tripartite one where the dealer and the financier are two distinct entities. The tripartite transactions can be of the sales-aid type where the dealer arranges for finance and does the necessary paper work on behalf of the borrower. Under such transaction, the credit granting decision lies with the dealer, of course subject to the eligibility criteria stipulated by the finance company. Such transactions are structured with recourse to the dealer. On the other hand, a tripartite transaction can be of the conventional type where the customer approaches the finance company to avail of the credit facility. STRUCTURE OF THE TRANSACTION A consumer credit transaction can be structured in the form of hire purchase, conditional sale or credit sale transaction. As we have discussed earlier a hire purchase is a contract of hire with the option to purchase. The customer, while having the option to purchase, need to the terms and condition of the agreement and return the goods at any time subject to the terms and conditions of the agreement. In a conditional sale contract, the ownership is not transferred to the customer until the total purchase price (including the charge for credit) is paid and the customer cannot terminate the agreement before the purchase price is paid. In a credit sale contract the ownership is transferred to the buyer on payment of the first installment. The customer however cannot cancel the agreement before the total purchase price is paid. Most of the tripartite consumer finance transactions are of the hire purchase style. DOWM PAYMENT Consumer finance schemes can be broadly classified under two categories: 1) Down payment schemes 2) Deposit linked schemes. The down payment varies between 20 per cent and 25 per cent of the value of consumer durables. Likewise the security under the deposit-linked scheme varies in 15 to 25 per cent of the amount financed (which is equal to the investment outlay). The deposit is of a cumulative nature carrying interest the prescribed rate (at the time of writing cannot exceed 15 per cent compounded monthly). Some finance companies offer zero deposit schemes under which the equated monthly installments higher than the EMI under 15 per cent and 25 per cent deposit schemes. Repayment Period and Rate of Interest The repayment schedule is drawn on the basis of monthly installments over a period varying between 12 months and 60 months. The borrower is permitted to choose the most convenient repayment period from the given range of option. While the rate of interest is typically expressed as a plat rate some financial intermediaries like city bank disclose the effective rate of interest. In recent times many finance companies have dispensed with the practice of disc losing the rate of interest. Instead they disclose the equated the monthly Installments associated with different repayment periods. The payment is required to be made post-dated cheques. In respect of institutional consumer credit schemes where the finance is routed through the organizations which employees the borrower, the organization concerned is required to deduct EMI at source and transmit the payment to the finance company. Most of schemes provide for early repayment of the loan of the subject to certain conditions. They also provide for either a rebate for prompt payment or for a delayed payment charge. SECURITY The consumer is secures to the first charge on the asset concerned and the borrower is prohibited from selling or pledging or hypothecating the asset during the credit period. PRODUCT RANGE Consumer credit is the need available for a wide range of durables like passenger cars, two-wheelers, TVs, VCRs, personal computers, washing machine, cooking ranges, food processes and mini generators. BORROWER PROFILE AND ELIGIBILITY CRITERIA The types of borrowers covered by the consumer finance schemes are the individuals, partnership firms and private and public limited companies. The eligibility criteria for individual bor5rowers include a minimum level of annual emoluments, minimum number of years in the present employment and minimum take-home salary. For partnership firms and companies, the criteria include a profitable track record, minimum levels of sales and net-worth. CONSUMER CREDIT PORTFOLIO MANAGEMENT (SOME ASPECTS): As is often said, building a large consumer credit portfolio is not a difficult task as compared to managing one. This is so because ‘managing’ entails evaluating, monitoring and controlling a large number of individual accounts. Therefore a consumer credit institution must primarily focus on streamlining the credit management function. CREDIT EVALUATION The first step in the streamlining process is to define and articulate a clear-cut procedure for evaluating customers. This is an onerous and difficult task .It is onerous because the number of customer s to be credit-rated is quite large. It is difficult because there are no hard data on the past payment record or on the financial position of the borrower (like the audited financial statements) to judge the willingness and the ability to repay. In some countries credit reference bureaus do provide a large part of information required for evaluating the credit applicant. The typical data stored on the individual file include: • Record of all registered country court judgments and decrees in the last six years. • Information supplied by other traders with regard to bad debts, slow paying accounts and repossessions. • Records of bankruptcies and administration orders. • Voters roll information Some credit bureau also file details of all satisfactory credit transactions reported to them by other users. In the Indian context, there are no credit bureaus to aid the credit-granting decision. For the credit evaluation of an individual borrower, the finance company calls for a copy of the salary certificate and the name and address of the employer. For the credit evaluation of business entities like sole proprietorships and partnerships, the finance company looks for the financial statements for the last two years duly certified by a charted accountant and the addresses of the bankers with whom the business entity has credit facility. Thus checking with the employer and the banker seem to be the only ways of obtaining independent reference information in India. CONSUMER FINANCE IN INDIA The consumer product market in India has under gone a sea change from what it was in 1980s to its present form. While liberalization has significantly contributed to this change, the influence of factors like going awareness among consumers, rising disposable incomes, huge ad spend by big companies and availability of a variety of goods, etc. can not be downplayed. Of late, there has been a sharp rise in the consumption behavior among the urban populace, especially among the upwardly mobile middle-income group. This growth of demand for consumer durables gives a great opportunity to financial institutions to promote their consumer finance schemes. Though the late 80s and early 90s witnessed the rise in the purchase of goods through financial schemes, over a period of time growth declined for most of the goods. In the rural area the purchase of goods through finance is more or less restricted to motor vehicles? The reason for the falling penetration of consumer finance could be either the negligence of financing companies in promoting their schemes or the lack of awareness among the consumers about the availability of finance for various goods. Actually we feel that there is a lot of money involved in consumer finance industry and the players should focus on rigorously marketing their schemes and developing new product specific schemes. The first phase of evaluation of consumer market in India the 80s and most of the 90s – was characterized by some structural changes from the consumer’s angle. With greater availability of consumer products increasing number of players and hence their competition for a share of the market, the consumer had a wider choice. This was accompanied by substantial rise in media and advertising as well as household incomes. Increased product availability and incomes led to tapping of the latent demand for the consumer goods on the one hand. On the other hand, higher level of media reach and advertising enable the creation of consumer awareness and aspirations. In the process, a whole lot of people with aspiration to consume emerged. Consumer finance came up noticeably for housing and purchases of manufactured consumer products that are relatively high priced. The latent demand came from two categories of consumers – those with capacity to consume and other aspirants not in a position to do so on their own. From whatever source it might be, an option of financing was open to both types. This piece focuses on the potential mass market for goods and consumer finance therein. Consider the ownership of high priced consumer durable products from mere 11.8 million in 1985-86; it grew almost six fold by 1995-96, although it is just a tenth of the stock of non-white goods. Equivalently, per household stock of white goods grew to 0.4 assets from 0.1 during this period. About 72 percent of purchases of white goods ended up in urban households in 1996-97. This proportion was even higher in the earlier years. Thus a major chunk of these goods are in the possession of urban household. That amounts to urban stock penetration of white goods taken together going up from 35 percent in 1985-86 to 135 percent in 1995-96. During the ‘90s the financial institutions also made an impact on the purchase behavior of the consumers. This period witness the high aspirations to consume along with faster growth in incomes. Whether public or private, financial institutions have a larger role to play in the future market growth. Besides expending the ground coverage, their effective utility in terms of actual purchases through them by consumers has a much greater scope than what they have been realizing. So-called plastic currency or credit card is playing vital role in consumer finance the banking institutions, the manufacturers, and marketers have sound network spread across country. New technology will pay more important role in future in the Indian consumer market. CONSUMER SERVICE AVAILABLE FROM CONSUMER FINANCE Both the organized and unorganized sector has together sought to address the problem. In the organized consumer finance sector, mainly Citibank did the pioneering work when it launched city home “shelters” a one-stop shop for buying a home, Citimobile-a package to finance cars. It also launches a number of other schemes to finance white goods and two-wheelers. American Express followed, but had to go in reverse gear because the problem of bad debts. In the unorganized consumer finance was the indigenous moneylenders overcharging the consumers fully aware of the lack of consumer interest in seeking redressal. However the organized sector offers finance at competitive rates promising to revolutionize the business and make finance option available to a wide cross section of people on a wide assortment of products. Consumer finance saw a new face lift through forming joint ventures and offer consumer finance for even products that couldn’t be retrieved and sold in case of default of payment for example SOTC a tours and travels company offers package loans for consumer to Europe, US, UK and Australia. Now you can avail loans for your studies, marriages, Anniversaries and for buying jewelry, or any personal loans and credit card facility. Most of the personal finances are financed by HDFC Bank and foreign Banks and for credit cards Citibank and standard Chartered are leaders It even eliminated excessive documentation, need for guarantor, increased processing time and had customer friendly approach. Now consumer is the king even he need not to go to banking institution he can process all the documentation through Internet. This enabled consumer finance easy access to middle class consumer. MARKET SIZE OF CONSUMER FINANCE The size of consumer finance market is estimated at Rs.50, 000 crore (including a credit card spend of Rs10, 000 crore) And this is growing at a rapid clip of 25 per cent . it is also a period when, for the first time , many Banks left their earlier preoccupations with funding industrial projects and working capital, and took the conscious decision to fund consumer demands and finance. Yet consumer penetration in India is just 2 per cent of GDP against the 20 per cent reported in Southeast Asia. In the US, on the other hand, 40 per cent of the total banking credit is given to the household sector. MARKET SCENARIO-MAJOR PLAYERS IN THE CONSUMER FINANCE SECTOR In the public sector, the state bank of India (SBI) is making move to keep private sector lenders from appropriating the entire consumer finance pie. Its brand “Big Buy” aims to finance both small and big things, from kitchen appliances from cars. Indian Banks offer loan at 10-16 per cent and allow a repayment period of 36 to 60 EMI, for housing finance repayment period is even more. The liberalization wave in the early 90s saw the emergence of a new mainstream business literature through the evaluation of NBFC (Non banking finance companies) these companies enable hire purchase scheme for consumer durables, though actually no hiring is involved it is just plain consumer finance. Some top players here are ICICI HDFC, Citibank, Bajaj consumer finance, Kotak Mahindra, Bank of Baroda, etc. There are loads of offers available in market with different interest rates ,rates which are less attract consumers but still consumer go for higher rates charged by private banks because of good service and less complexity. There are two kinds of rates which financial institute and banks charged: 1. Fixed Rate 2. Floating Rate Fixed or Floating? A decision on whether you should go in for fixed-rate or a floating rate loan now is functional of two factors: your perception of where interest rates in the economy are headed, and your capacity to ride the interest rate charges. A floating-rate loan lets you take advantage of further falls in interest rates, but you stand to loose if interest rate rises again. In other words, floating rates make sense only when the interest rates are high and expected to fall. On the other hand a fixed-interest loan immunizes you to interest rates jumps. If however, interest rate falls, you can foreclose your loan and refinance it on a lower rate-either with other lender or increasingly, with the same one. Typically, fixed-rate loans come at marginal higher interest rate than floating rate loans: that’s the price you pay for not wanting to bear the interest rate risk. Table below shows the different rates of interest of various financial institutions in housing finance. INTERESTING OFFERS Effective Interest Lender 5 years 10 years 15 years 20 years FIXED RATE Corporation Bank 10.41 10.90 10.89 10.89 ICICI Bank 11.02 11.50 11.50 11.49 State Bank Of India 10.75 11.50 11.50 11.49 GIC Housing 11.25 11.50 11.50 N/A Dewan Housing 11.25 11.50 11.61 11.71 Standard Chartered 11.75 11.75 11.75 N/A CanFin Homes 11.77 11.92 11.87 12.21 Syndicate Bank 11.95 11.95 11.95 11.96 HUDCO 11.75 12.00 12.25 N/A HDFC 11.75 12.44 12.37 N/A LIC Housing 11.75 12.44 12.37 13.20 Tata Home Finance 13.71 12.69 12.37 12.21 FLOTING RATE Corporation Bank 10.41 10.90 10.89 10.89 IDBI Bank 10.49 10.99 10.99 11.01 ICICI Bank 10.49 11.01 11.01 11.00 Standard Chartered 11.02 11.01 11.01 N/A State Bank Of India 10.49 11.01 1.09 11.00 Syndicate Bank 11.26 11.26 11.26 11.26 HSBC 15.51 11.26 11.26 11.26 HUDCO 11.00 11.25 11.50 N/A Tata Home Finance 11.51 11.50 11.51 11.51 LIC Housing 13.15 12.18 11.86 11.71 CanFin housing 13.17 12.18 11.87 11.71 HDFC 13.17 12.18 11.87 11.71 EMERGING TRENDS IN CONSUMER FINANCE BPL introduced the millennium flexi-home plan where the consumers can choose a combination of BPL products called “Make your own home plan “ and get a BPL product free with 0% interest and the offer is being serviced by a large number of consumer finance companies. All this started with a 0% interest free loans from DCM Daewoo’s Cielo car. Following its footsteps a whole number of consumer durable giants like Thompson, LG, ONIDA, etc. are presenting their offers in market. Hp introduced pavilion home PC by paying just Rs. 2988 per month to capitalize on the growing demand for computers among consumers. These companies tied up with number of consumer finance groups to service the growing demand and creating an indispensable necessity for products among consumers. FUTURE OF CONSUMER FINANCE Many players have and will come to play in the market, because there are no barriers to entry, only holding of assets required, ability to source funds, capability to reach out to the customers and ability to understand the credit risk. On the other hand today with the NBFCs showing a poor management of assets and misuse of public deposits leading to many a NBFCs failure has only resulted consumer to prefer indigenous lenders of loans. Further many MNCs will also enter the scenario with growing liberalization of world trade of service the Indian consumer desire to accumulate a high standard of living, as he is also shedding of his “Shame Syndrome” in obtaining loans. Thereby the market may see a boom in the unsecured loans being delivered door-to-door in future. Overall, we can see that this market is characterized by quick loss of product differentiation due to competitive offerings and it will only be great ideas, which will drive the successful. SOURCE OF FUNDS The consumer durable companies enter into strategic alliance with Nationalize Banks in the public and private sector (e.g. 0% interest finance on all ONIDA color TVs being serviced by countrywide finance, Bajaj auto finance, Trans Apple distribution and ICICI). These service providers raise funds through issue of debentures, shares, public deposits, etc. This strategic alliance bridges the gap between those with cash surplus (service providers) and those with cash deficit (consumers) and thereby earns a share of profit margin on the product apart from interest on loans. Further the producers also need not wait for GDP to rise as products are bought this way. It further lowers the barriers to ownership among individuals who cannot purchase something because of non-availability of cash for purchase in a single shot. SWOT ANALYSIS A SWOT analysis of the CF would reveal its strengths, weaknesses, opportunities and threats. This would enable us to develop suitable strategies. Strengths Improves the Standard of Living Consumer finance offers extend over a wide assortment of goods from automobiles to computers to televisions to water heaters and also at competitive rates with bundled offers that it certainly goes to benefit the living standards of consumers. Access to Middle Class High value items out of reach of the middle class because of the absence of instant cash and need for guarantors- today can avail these “Buy now-Pay later” schemes. Win-Win-Win situation Consumer finance fulfills consumer’s immediate need. It also works in favor of financiers, who make profits by being the middlemen between those who have cash surplus and those who have deficit. It also works in favor of the producers of the products that get bought this way. Hence, it is a Win-Win-Win situation. Competitive Finance package Finance is available for a minimum-processing fee of 2 percent on the loan amount sanctioned. An advance of a month installment is only collected. Easy installment plan facilitates purchase of durables like refrigerator for a mere amount of Rs.310 per month from 36 months. This is contrast to firms collecting installment fees of 3-6 months in advance. Eligibility for finance Loans are easily forwarded to salaried/self-employed individuals earning a monthly pay of about Rs. 3500 on provision of income proof, proof evidence, identity(ration card/passport) and copy of bank pass book. High processing fees The traditional barriers which demotivated consumers to seek finance is removed through the professional players in the field. Today the length of the application form is just a page and does not also require a guarantor and processing speed in an average of 2-3 hours Customer friendly service Weakness Rate –Sensitivity Of Consumers Initial loan takers are not price sensitive as they are glad that such an option is available. But this number is too low. Then when the base expands and competition kicks in, and when they see finance companies are actually vying to give them loans, they turn very rate sensitive. Loans – Always A Secret Affair Loans is a sign of ones financial distress and still it is a secret affair. Especially in the unorganized sector, which still continues to dominate the market, they overcharge fully aware of the lack of consumer interest to seek redressal. The negotiation power is with the financier and this means the consumer had to nod to every term set forth. Play Of Economic Variables The varying inflation/deflation rates are rarely stable and only worsens matters resulting financiers to charge high rates or miscalculate rates deterring the consumers interest. Debt Trapping Device There is a widespread criticism of consumer finance that it baits the consumer ultimately into a debt trap. These licensed moneylenders are looked upon as predators who can keep them in debt for the rest of their lives. No Reliable Database The major weakness is studying the credit worthiness of consumers as no common database of defaulters is maintained by companies, although each company maintains its own. Hence a defaulter of one company can easily knock the doors of competitors. Lack Of Co-Operation Among Existing Players To develop a database of loan takers and their credibility status requires the collective support of banks and finance companies. But the collective efforts taken by EquiFirst -- a joint venture between first leasing and Atlanta based Equi-fax for tracking of behaviour was a failure as financiers were not keen to share their knowledge. Opportunities Paradigm shift in consumer behaviour No longer the consumer considers these “Buy now-Pay later “ scheme as a shame or sign of his financial distress. This seems to favour their acceptance of consumer finance. Individual credit rating enterprises Agencies for the credit worthy of consumers are coming up into days scenario so as to keep check on consumer behaviour and defaulters, thereby facilitating the processing process for consumer finance companies and hence would enable them to service the consumers better. E.g. Onicra from Onida is a credit rating service for individuals in India. Facility for personalized loans Anz Grindlays, Citibank, ICICI are offering personalized loans at the consumer’s doorstep especially for the high-income group consumers occupied. Threats Parallel growing loans segment Unorganized consumer finance: This sector comprising of local/rural money lenders thrive in the market and they follow a pattern of informal money lending and retrieving . Chit groups/kitties: This is growing popularly among men and women alike here a group of 10-15 people are gathered to form a kitty for a period say 12 months and each contributes a fixed amount each month. At the end of each month, members can bid and the person with the best discount bid gets to use the cash. These groups enable the purchase of a number of consumer durables. The processing is also quick and efficient than the big financiers consumer lending. Further in times of necessity of money by a kitty member the others are ready to defer the repayment. Unlike the organized consumer finance companies which resort to harsh method of retrieval. Strategic solution based on SWOT By plotting the internal strengths and weakness of consumer finance and by considering the opportunities and threats from the external environment the following strategic solution can be arrived at: SWOT Internal Strengths Internal Weakness External Maxi-Min Mini-Max Opportunities Strategy Strategy External Maxi-Min Mini-Max Threats Strategy Strategy Maxi – Max Strategy This aims at maximizing the strengths of the firm to make the maximum use of the opportunities presented by the external environment. ? Information processing technology should be used in its best to enhance the processing of consumer finance requirements by following the process of distributed processing technique (A consumer finance company having distributed units having access to centralized database). ? Mediate with the services provided by Credit Rating enterprises to build on its database or creditworthy and defaulting list of consumers (e.g. ONICRA a credit rating agency set up by ONIDA). ? Establish firm relationship with producers of durables to enhance their customer friendly service. Maxi – Min Strategy This aims at making the best use of the consumer finance strengths to cope up with the threats. ? Relationship marketing strategy assure a customer friendly and silent steps to retrieve loans from customers as against the hard retrieval measures followed by indigenous lenders . ? Provide a safe, structured and documented consumer finance so as to safeguard the interests of the consumers as against the informal kitties/chit groups being organized. Mini – Max Strategy This aims at making the best use of the opportunities in the external environment so as to overcome the weakness of the firm. ? Defaulters can be avoided by cooperating with external agencies in building a reliable database. ? Rate sensitivity of consumers towards consumer finance can be minimized with their changing tastes and preferences. ? Consumers being reactive, companies should inform them of the changing rates on consumer finance due to the play of economic variables. Mini – Min Strategy Here aim is to minimise the weakness of the firm as well as the threats posed by external environment. ? Establish strategic alliances or form joint ventures (e.g. Country wide personal finance formed by the joint venture between HDFC and GE capital ). ? Leave the market. GUIDELINES FOR TAKING CONSUMER FINANCE Example: Car Loan Before going for consumer finance option a consumer should follow following guidelines for taking up consumer finance we have taken the example of a car to make it simple to understand. The guidelines are as follows: THE RIGHT DEALER The first step is to identify the best suitable dealer, dealer with good quality products, more options or varieties, better discounts and services.It was not often that you have dealers queuing up for your custom, as they are now; so make the most of it. Shop around ith a few dealers and play one against the other, but make sure you are comparing prices of models with similar features. THE RIGHT SCHEME Once you have identified the best dealer, you will have to choose the financer who gives you the best deal. To do this, you will have to apprise different lenders against the various types of schemes on offer. Margin money scheme: The most common scheme going here, you make down payment (typically 15per cent of the cost of the car) and the lender lends you the rest. With in this, however there are two variants: the advance EMI’ scheme and arrear EMI’ scheme. in the advance scheme the EMI is paid at the beginning of each month ;in the arrear scheme , it is paid at the end of each month . For example, if a loan is disbursed in the last week of March the EMI for April is paid in the first week of April under the advance scheme, and towards the end of April under the arrears scheme. At a given rate of interest, The EMI under advance scheme is generally lower than that under the arrear scheme but there is no difference in the effective rate of interest you pay. That said, if you find that you’re being quoted the same EMI for both arrear scheme and advance payment, go for the arrear scheme. Advance monthly installment scheme: Some lenders claim to offer 100 per cent loan but ask for a few EMI’s in advance .In effect, therefore ,you end up paying the margin money and additionally interest thereon (because it counts as 100 per cent loan ). Bottom line is you are not getting a 100 per cent loan , and you will be paying more as interest than you will be under margin money scheme .Illustratively on a Rs200,000 loan at 15 per cent interest over 5 years , the effective interest works out to 19.17 per cent when you pay 5 installments in advance. Security deposit scheme: Here too, the financier offers you a “100 per cent loan” but ask you to deposit a proportion of the car value with him. For example if deposit is Rs20000 for a loan of Rs100, 000, in effect, the 100 per cent loan translates into 80 per cent loan. Such schemes normally come with the enticement of a lower interest rate, but what you gain by the way of interest, you loose by way of opportunity cost on the deposit you park with the lender. In a variant of these schemes, the financier may offer a monthly interest on your deposit, but this rate is normally lower than the interest rate on your loan. Again if you feel the deposit you park may earn a better rate elsewhere, this scheme is not for you. When you are comparing two lenders, therefore remember to compare the EMIs only in respect of similar schemes. In practice, however the intensity of competition in the marketplace has effectively leveled the playing field and few lenders today offer the advance monthly installment scheme or the security deposit scheme, which are unattractive to most customers. That is no reason, however, for you to lower your guard. Before you sign on the dotted line, make sure you know that you are letting yourself in for. THE RIGHT FINANCER Most car dealers have tie-ups with different private banks, including foreign banks and non-banking finance companies (NBFCs). The interest rate they offer and the terms of lending vary within a small range, depending on the make and model of the car, the loan tenure and the type of lending scheme. Opting for a loan from a lender attached to your dealer may save you some legwork, but doesn’t always protect your best interests. That’s because lender too have some room to flex interest rates in your favor, and they may have to share this spread with your dealer who serves as a conduit for your custom. However if you do shop around, you are sure to be rewarded with better deals .Approach lenders (or better, still their agents)directly and, as you did with the dealer, drive a hard bargain. Some lenders may offer attractive interest rates, on condition that you go to one of the dealers that they have an arrangement within. Under this arrangement, the lender gets an incentive from the dealer for directing the customer his way. But it means having to forgo the discounts you may have negotiated with the dealer of your choice; the deal isn’t the one for you. Ask for the same discount as you’d negotiated with your dealer, or threaten to walk away. In this Darwinian marketplace, faced with the loss of a customer your lender can be persuaded to live with the dealer of your choice. This way you get the twin benefits of the best discount you have negotiated and the best financing scheme. Today on the face of it, there is very little to choose among the various financiers, but to get the best deal have a close look at these elements a) How the interest is charged: Most lenders charge interest at monthly rates. As a rule the most often it is charged, the better for you, for the interest is charged on progressively smaller amounts outstanding. Always compare the EMIs and the total payment you will need to make, not just the interest rate. For example on a loan amount of Rs2 lakh, given loan tenure of five years and an interest rate of 15 per cent the EMI is Rs4972 when interest is charged at annual rests but only Rs4,758 at monthly rests. The total payout in the two cases works out to Rs2, 98,304 and Rs2, 85,475, respectively In unorganized markets, financers charge a flat rate of interest where the interest is calculated for the full tenure of the loan on the amount advanced. In effect, you pay interest even on the amount repaid, which pushes up the effective cost of the loan. b) Find out the total financing cost: In addition to the interest rate and the frequency of the charging, the up front payment (if any) impacts the total financing cost (TFC). This may include processing fees (which however no lender charges today) or advance payment of EMI in some schemes. c) Negotiating the pre-payment terms: Currently, car loans are available at interest rate of 12-15 per cent whereas fixed deposit rates vary between 4-7 percent. If you came into some unexpected money a year or two down the road, it might make sense, given the interest rate scenario, to foreclose your car loan. Lenders levy a penalty in case of partial or full prepayment, but again as a concession to the demands of sluggish marketplace, they are increasingly opting to waive this clause, just in case you come into some money. On balance, public sector banks offer reater flexibility than private financiers in prepaying without penalty; with them however, your loan proposal must be guaranteed by a high net worth individual. GET MORE MILEAGE Even though the most of the schemes that are currently on offer are virtually indistinguishable, it’s possible to extract some additional concession from one lender or the other. Here is how: a) Leverage your relationship: If you have an existing relationship with a lender- be it a saving account, fixed deposit, a home loan, a credit card or whatever-you can leverage into extract an additional concession on the interest rate. This works particularly if you are a high-net worth consumer and can convince the lender you would not baulk at foreclosing FDs or surrendering your credit card if you are not humored. b) Go to direct sales agent: Most private banks, including foreign banks have appointed direct sales agents to mobilize car loans These DSAs (Direct Sales Agents) receive commission on numbers of cars finance proposals that the bank approves. In some cases these DSAs can be persuaded to pass on a part of their incentive and offer you a lower interest ate than that offered by the bank. These DSAs are not hard to locate either: they’re into aggressive marketing these days and advertise in papers. c) Package deals work: A group of two to three potential car buyers will have greater negotiating strength; both with the dealers and financers, and can extract significantly greater concession. d) Check out corporate deals: If you are a salaried individual, check if your company has especial arrangement with any bank under which you can get additional benefits. Compare the benefits from such corporate deals Vis-a -Vis a deal you may get from financiers or DSAs In the final analysis, how good a dealer you swing for yourself depends on how well you juggle all the factors and play your cards. Your greatest strength in today’s market, given the prevailing circumstances, is that your custom is in great demand. Leverage that as best as you can and savour a good deal when you land one. WHAT IS ZERO PER CENT INTEREST LOANS? IS IT REALLY 0 %? In attempt to pump-prime a flagging car finance market, some financiers offer a “Zero per cent loan” .But just how good is it? For a start, if you opt for it, you have to forgo cash discounts offered by manufacturers and dealers, which the financier pockets. In some cases, each discount adds up to as much as Rs.30, 000. Also, zero per cent loans cover only 25 to 60 per cent of the car’s ex-showroom price. This means you pay a bigger down payment from out of your savings, which if you’d invested you’d have earned interest. That opportunity cost needs to be factored in while estimating the value of the zero per cent loan. Additionally lenders levy a “file charge” (much like a documentation fee) on such loans. What’s more, the tenure in respect of these loans never exceeds 18 months; for you, this means certainly higher EMIs. So don’t fall for that catchy slogan. Evaluate your gains (interest saved) against the hidden cost (the discounts you forgo, the file charges and opportunity cost on the higher down payment). Only then can you say if that zero per cent loan is worth zeroing in on.