Bargain Your Way Into That Dream Car

Updated: Aug 31 2003, 05:30am hrs
If wishes were horses, beggers would ride - these words would have been the gospel truth a decade back. But buying a car has never been so easy with a plethora of financing options. In fact, loans are chasing borrowers in this buyers market. Suddenly wishful thinking is cool and achievable. The easy disbursement of loans have given the Indian middle classes the much required purchasing power, be it in the case of housing, cars or even mobile phones.

The Checklist While Buying A New Car
Step 1: Half knowledge is dangerous. Always research the features, fuel efficiency of the car you wish to buy before approaching the dealer.
Step 2: To get a better deal on the car, decide to buy during the monsoons as car sales normally slide during this period. Also, if a particular automobile company is launching a new model, then there are chances that you may be able to wring out a good discount on the existing models.
Step 3: Test drive a car of the same model that you wish to buy and make sure that it measures up to your expectations. Dont just drive the car on the highway, but a place with potholes to check whether the drive is smooth.
Step 4: Once you are satisfied with the drive quality, start the price negotiation process. Do not let the dealer know that you are in love with the car. Try and squeeze out the maximum discount possible.
Step 5: Most dealers offer some goodies and extras alongwith the car, like free accessories, scheduled maintenance or polymer coating. Make sure that you manage to negotiate the same into your car deal.
Step 6: If you have an old car, do not sell the vehicle to the dealer, as it gives him an upper hand and you are guaranteed to get less money for it than if you sell it on your own. Instead, try to bump off the car on your own.
Step 7: Once you reach the negotiated price for the car, talk about the finance option available. Ask the dealer to be totally transparent about the working of the finance option and the interest and see whether you have to pay advance EMIs. If you are not a financial whiz-kid, cross-question if needed and make sure you are aware of all the hidden costs.
Step 8: While signing the papers, make sure to see that everything is in order. Check every figure, number, decimal and instructions given in fine print. Refrain from signing anything, if something is left blank.
The trend is noticeable especially in the case of cars, where banks and financial institutions (FIs) are going all out to help the average customer with his four-wheeler. According to dealers, 80 per cent of the cars purchased in the country at present are through the finance route. Gone are the days when most families saved to buy the entry level Maruti 800. Today, more and more first-time consumers are either directly buying or are upgrading to C or D segment cars (higher models with advanced features) due to the easy availability of finance and lower interest rates.

Currently, for financing cars, banks and FIs have a rack rate of around 12 per cent for small cars and around 10 per cent for the C and D segment cars. However, these rates are negotiable and you can talk down the interest rate.

Generally, finance companies offer around 70- 85 per cent finance depending on the credibility of the customer. However, if a customer has a very strong credit background and a good existing relationship with the finance company, then even 100 per cent finance can be availed of. The tenure of the loan normally varies between 1-5 years and in case of prepayment of the loan, most finance companies have a pre-payment penalty which the borrower has to pay in addition to the amount borrowed.

Majority of car finance companies have around three different finance schemes, namely - advance Equated Monthly Installment (EMI) scheme, step down scheme and arrears EMI scheme. In the advance EMI scheme, the borrower has to pay one EMI in advance and 35 EMIs for a loan tenure of three years. In the step down scheme, the EMIs to be paid keep reducing as the tenure of the loan progresses.

In the arrears EMI scheme, there are no advance EMIs taken. A borrower will have to start paying his EMIs only after a certain number of days as fixed by the bank. In the case of ICICI Bank, a borrower can pay his first installment after one-and-a-half months while in the case of ABN Amro Bank, the repayment period for the first EMI commences in around 15 days.

However, in certain cases, customers are asked to deposit a nominal sum - called security deposit - which is refundable. This scheme is mostly run by car dealers. For instance, a customer has to keep a deposit of around 25 per cent of the car cost as security with the dealer who, in turn, makes available the finance for the car.

Once the customer pays up his entire loan amount, the dealer will return the customers security amount. Under this finance option, a car dealer avails finance on his name from the bank and procures the car for the customer. However, buyers must bear in mind that there is an opportunity cost for the security deposit as you are not paid any interest over it.

However, when its time to make that big decision of buying a car, the bargaining ability of the consumer reigns supreme. If a consumer is keyed into the market and aware of the nitty-gritties and the financial jargons used by the finance companies, he can definitely wring out a good deal from the finance companies.

But, the bottomline here is to negotiate. For instance, recently Santosh Hegde (name changed) purchased a Skoda Octavia Ambiente model (Rs 11,16,000 ex-Vashi, on-road price), availing 100 per cent finance from HDFC on the ex-showroom price of Rs 10,30,000.

The bank offered him an interest rate of around 9 per cent which was not acceptable to him. Mr Hegde bargained and eventually got the loan at an effective interest rate of 5.4 per cent! For a three-year tenure, his EMI worked out to be Rs 30,930 per month.

However, a direct selling agent (DSA) of a multinational bank says that he could have done better.

He further adds: If a customer can bargain and bring down the interest rate down even by 1 per cent, the saving will be enormous and worthwhile and in some cases it will help the customer to pay either the insurance or the registration fees with the amount saved.

To substantiate this, the DSA gives the example of a Maruti 800 (Rs 2 lakh) bought on 100 per cent finance at an interest rate of 12 per cent for a period of five years. At 12 per cent, the customer will end up paying Rs 5,780 per month for five years. If the interest rate is negotiated and brought down to 11 per cent, then the monthly outgo will decrease to Rs 5,637.

The difference between the two EMIs is only Rs 143 per month, but when calculated over a five-year period, it amounts to Rs 8,580 which can be utilised to pay the registration fees.

Take the case of Amita Mukherjee (name changed), who recently bought a Honda City 1.5 exi (Rs 8,87,243 ex-Mumbai, on-road price), availing 100 per cent finance from ICICI on the ex-showroom price of Rs 8,24,311.

The EMI for a five-year tenure came to Rs 16,975 per month. The dealer offered Mrs Mukherjee a cash discount of Rs 20,000 and further discounts on various accessories and services.

In this case, Mrs Mukherjee not only managed to get a lower interest rate, but also a discount from the dealer. Dealers enjoy a margin which is normally the difference between the ex-factory price and the ex-showroom price. If a customer does not look too eager to buy, most dealers take a cut in their margins and pass it on to a buyer while selling the car.

At the same time, DSAs get commission from the finance companies while selling a car with finance options. Even here, a customer can bargain and get the DSA to pass on the benefits of lower interest rate. DSAs are known to pass on a part of their commission.

Also, to save on costs, customers should be on the lookout for an area in the vicinity where octroi costs are lower.

For instance, if one buys a Maruti 800 in Mumbai, then he pays Rs 2,38,825 (inclusive of octroi). If he purchases it from Thane, 30 kms from Mumbai CST, then he can get the car for Rs 2,27,647 which is Rs 11,178 cheaper. In the case of a car like the newly-launched Mercedes 200K, the difference is as much as Rs 1,19,774. The Mercedes 200K is costing Rs 28,09,999 (inclusive of octroi) in Mumbai, while in Thane, it will cost Rs 26,90,225.

However, the only hitch is that the customer should have a property on his name in that particular area. Mr Hegde had a property in Thane and therefore, got his car registered there to save on the octroi costs.

Further, if customers are ready to pay extra, then they can even get a registration number of their choice.

By officially paying Rs 10,000 to the Road Transport Organisation (RTO), customers can pick and choose a number of their choice, if available, for registering their cars.

So if you have been eying that sleek Mercedes or the sporty Lancer, this is the right time to take the plunge. To borrow a line from Frank Lloyd White: Give me the luxuries of life and I will gladly do without the necessities.