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S. Muralidhar

CHOOSING to buy the car of your dreams is the easiest part of the purchase process. Getting to the bottom of how to fund the buy is another matter altogether. Financing the car you have `zeroed in' on is a job by itself and lot more complex now, since it comes with a myriad options and rates. And importantly, the interest rates that you can get now for that car loan is not connected to the rates available in the market for other types of consumer loans.

The passenger car market has been growing at a scorching pace the last few years and cut-throat competition among manufacturers has meant that they have had little room to manoeuvre the various parameters that make up the cost of selling a car. With rising input costs and dropping margins, manufacturers have been forced to ally with their dealers and financiers (such as banks and NBFCs) to boost their margins from allied services and products.

In fact, the practice of discounting and subvention is so rampant that it is now market reality that most dealers make much less money from each car that is sold than used be the case a few years ago. The industry is loath to reveal the exact numbers, but market information puts the average per unit net realisation for dealers from most small cars at less than Rs 3,000. The dough really rolls in only from the other services (including financing), accessories and paid servicing over a period.

The point of all this gyan about the current market dynamics is to highlight the disconnect between the rate of interest that you can wrangle out of the dealer-financier compared to what are called the rack rates. But, more important, there is also a divide between getting the lowest rate of interest on the car and getting the best deal overall on your next set of wheels.

Before we get to the details of landing the best car finance deals, allow us to urge you to do a bit of lateral thinking. Almost 80-85 per cent of all cars sold are financed by banks or finance companies. And almost all of these are done through car loans that adopt the traditional financing model, which means some down-payment and equated monthly instalments (EMIs). Here, the car loan's tenure is prefixed and the EMIs are calculated at the applicable interest rate on a reducing balance basis.

While this model is still the most common, it may not offer you the best deal overall on the car you intend buying. Why?

Discounts and freebies offered by the manufacturer as part of a special package for the car, add-ons thrown in by the dealer and competitive interest rates offered by the financier all form a confusing melting pot that leaves the car buyer thinking he has got a great deal, while in reality it could have been bettered.

Yes, competition has ensured that manufacturers are now working on thinner margins, as are dealers and financiers due to competition. But to minimise the total cost of the car purchase, the buyer has to look at each of these three deals separately and not together. That is where the lateral thinking comes in.

By bunching up their services, the manufacturer, the dealer and the financier ensure that the car purchase looks attractive in a unique way compared to the other manufacturers.

Many carmakers such as Maruti Udyog and Hyundai Motor India have preferred financing arrangements with banks and NBFCs that enable them to offer special rates (in other words lower EMIs) even for traditional financing. Despite the availability of such special arrangements that the manufacturer or in many cases that the dealer has, most car buyers can still get a better overall deal (discounts, freebies and lower interest rates) if a separate deal is brokered with each of them.

Manufacturer's discounts (such as first year insurance waiver, freebies and price cuts) are advertised and are unlikely to change in specific cities or for specific customers.

So, after the car has been chosen, the bargaining will really have to be done separately only with the dealer and the financier.

So, if the average car buyer talks down the rate of interest on the car loan with the financier first before approaching the dealer for getting the lowest quote on the car or for bargains and freebies, he would, in most cases, be able to manage the lowest overall cost of purchase.

Secure the loan at the lowest possible rate of interest and then negotiate with the dealer for the best overall deal on the car. Barring a few exceptions such as Honda, car dealers are already offering discounts on most models. Dealers in some cities and regions are also more prone to adopting discounting for attracting customers into the showroom.

As yet, the credit rating or credit worthiness of the car buyer has not come into vogue as a parameter to be considered by the financier before the best applicable interest rates can be offered. But when credit history becomes the basis on which the rate of interest gets pegged, the bargaining capacity of buyers with a high rating will go up further.

A sampling of some of the interest rates currently being offered:

Bank of Punjab offers an eight per cent rate for all cars for tenure of either three or five years.

Citibank is offering 5.6 per cent and 7.4 per cent for all Maruti cars for three years and five years respectively. The interest rates for other passenger vehicles are 4.7 per cent and 6.8 per cent respectively for three years and five years.

Kotak Car Finance is offering a special rate of 5.8 per cent for a three-year loan on the new Honda City and a 6.7 per cent rate for a five-year loan for the same car.

GE Countrywide is offering a 7.3 per cent rate on all cars for a five-year loan.

(All the above rates are for loans calculated on a reducing balance basis. Some of them may be rack rates and hence buyers may be able to bargain for a lower rate.)

A few tips on securing the best car loan deal:

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