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Car Financing - Dealership Or Bank?...

17 December 2014, 06:30 PM

With India witnessing an increasing rate of urbanization and higher disposable incomes, the demand for cars continues to rise. As urban youth is looking forward to pick up the new car models, car dealers keep coming up with elaborate schemes and discount options to woo this band of customers. With this heightened need for owning vehicles, comes a growing need for car financing in India.

Car financing in India comes mainly in two options, the buyer can either opt for taking a car loan directly from a bank/lender or they can choose to avail finance from car dealers who will indirectly arrange a loan by facilitating it on your behalf, which is called dealer financing.

Salient points to keep in mind before deciding on which form of car financing to opt for are as follows:

  • Interest Rates - One of the most important points to consider when opting for any form of loan is to understand the car financing interest rates offered. Interest rates can vary from lender to lender, so it's important to study the options available in the market to ensure that you are getting the most competitive interest rate possible. Credit history is the factor that has the highest influence on securing a loan at the lowest interest rate.

  • Loan Tenure – The relationship is inverse here. Longer the loan tenure, the lower your monthly payments will be. The flip side is that the overall cost of the vehicle increases as the interest charges would be higher for a longer period of time.

  • Processing Fees - Banks and lending institutions charge an administrative fee for processing loan applications. While some institutions charge fixed amounts, others charge a fee based on the amount of loan applied for.

  • Late Payment and Foreclosure charges -  Buyers should check any late payment charges that the institutions might apply in case a payment gets missed or delayed. A foreclosure charge may also be applied in case a buyer wants to pay off the remaining loan amount before the actual tenure of the loan.

  • Insurance – A number of car dealers offer free car insurance bundled with the deals they offer. Buyers should also contact banks directly and see if a similar or better deal can be worked out with them.

There are some advantages that a dealer can offer in terms of customized financing options, which are available to them from the vehicle manufacturer. Since dealerships also tend to have relationships with multiple lending institutions, they can offer a wide variety of options. Also, as most of the paperwork is done by the dealer, it is more convenient for buyers to secure financing through dealerships.

But financing through dealerships has certain drawbacks that a buyer needs to be aware of:

Car dealers make a good commission on loans they arrange for their customers. So it is prudent that bank financing options be considered before jumping in for a loan processed by the car dealer.

Sometimes car dealers also offer mouth-watering financing rates to clear out end of model or end of year inventory. Be very careful as some stock may have been lying in storage locations for many months being subjected to extremities of weather and rodents.

Notably, the decision to borrow from a bank or car dealers is ultimately yours. Never be pressurized to take a loan with the fear that the deal or vehicle in question may no longer be available. With the options for car financing in India steadily increasing, carefully evaluate your current financial situation and your preferences to decide upon the most suitable option.

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