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Should you opt for flexible car loans?


Mumbai: Car manufacturers like Maruti Suzuki India Ltd and Hyundai Motor India Ltd have tied up with lenders to offer flexible auto loans.

Instead of a regular car loan, the borrower can choose from a step-up scheme, balloon scheme, and other loan structures.

Combine this with lower interest rates right now; the flexible repayment options can look attractive. According to data from Paisabazaar.com, borrowers can get new car loans for as low as 7-7.5% interest rates.

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According to data from Paisabazaar.com, borrowers can get new car loans for as low as 7-7.5% interest rates.

The idea behind different loan structure is to offer repayment flexibility to buyers depending on their cash flows.

In one of the loan structures, the lender allows low equated monthly instalment (EMI) initially, which increases over time. In another scheme, borrowers to pay lower EMIs for the first six months and then fixed higher EMI later.

Besides the regular loan, where the borrower pays a fixed sum every month, all other flexible repayment schemes come at a cost. They are similar to a moratorium a borrower avails on loan.

When there is no payment or lower payment for some months, the interest is added to the principal and interest is charged on it. Hence, the total outgo increases.

In step-up loans, the one benefit that borrowers get is that they can avail of a higher loan amount. As the initial EMI is low, the borrower can get a bigger loan. Borrowers pay lower EMIs in the initial years, and in the later years, the repayment is accelerated.

Such loans, typically, assume that the income of the borrowers will rise in the future. But as they charge a lower EMI, the outgo in step-up home loans is also higher than regular loans.

Flexible loan structures are targeted towards borrowers who are facing a crunch due to the covid-19 pandemic. Opt for such loans only if you believe that your financials will be better in some months. In case there is uncertainty, borrowers should altogether avoid taking any new liability.

If you are buying a new car, if possible, negotiate for a discount on the vehicle and finance separately. In many cases, if you negotiate them together, you won’t get the best deal.

(Do you have personal finance queries? Send them to [email protected] and get them answered by industry experts)

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