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Finance Schemes |
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What are the different Car Finance Schemes available? Margin Money One Advance Installment Scheme Multiple Advance Installment Scheme Security Deposit Scheme Customised Scheme- Staggered Installments Popular Schemes Compared Margin Money scheme:
The balance amount has to be paid by the customer as margin amount or downpayment. Interest is charged only on the amount financed. The repayment of the loan is made by Equated Monthly Installments (EMI’s) at the end of each month through post-dated cheques, which are collected at the time of signing the contract. Both, Banks and Finance Companies (NBFC’s) offer this scheme. One Advance Installment scheme: This is a variation of the Margin Money scheme where the financier collects an additional installment in the form of the first month’s EMI along with the margin / downpayment. The scheme has become a standard scheme, with most financiers pushing it as their favourite. The balance EMI’s are paid at
the start of subsequent months through post-dated cheques. The financier finances the full amount -100% of the car’s value. 3,4,5,6 or even more EMI’s are paid upfront (advance EMI’s) depending upon the Finance Tenure. The balance EMI’s
are paid at the start of subsequent months. The repayment ends earlier
than the finance tenure, corresponding to the number of installments that
have been paid in advance. Under this scheme you get 100% of the cars value as finance amount, on keeping a security deposit with the financier. The security deposit may vary from 15% to 35% of the finance amount. The security deposit earns an interest ranging from 14% simple to 14% compounded quarterly, through the finance tenure. One EMI is to be paid initially and the balance EMI’s are paid at the start of subsequent months by post dated cheques. The Security Deposit along with this interest earned on the deposit is refunded to the customer at the end of finance tenure. In the mid 90’s this scheme was used very effectively by the NBFC’s to beat the schemes that Banks offered, although the Banks offered schemes with lower rate of interest. Finance Companies offered interest as high as 23% compounded annually on the security deposit kept with them. For the customer, the total cash outflow with this scheme works out much lower than other schemes. Top Customised schemes -Staggered installments Most financiers are offering savvy schemes to lure salaried employees, who have more or less a structured career growth and can plan their cash flows well in advance. The finance schemes are tailored to suit individual requirements. A yuppie executive can get a scheme that matches his career path and increasing salary. Installments can be lower at the beginning and can gradually increase towards the end of the finance tenure. Schemes are also
possible for higher initial payments, which reduce in amount towards the
latter part of the finance tenure, thus decreasing the finance burden.
The scheme is very suitable for customers who have a lumpsum amount in
hand today, and who want a comfortable repayment pattern for the future.
Most customers have a crude method of comparing finance schemes. To throw light on this fact, we have compared the cash flows for three popular schemes. Car XYZ - Price: Rs.300000.00 (Rs. Three lakhs) Finance Tenure: 36 Months Assuming that a customer can shell out approximately Rs.70000.00 (Rs.Seventy Thousand) initially, we designed three schemes to suit him. |
|
Scheme
|
Margin
Money
|
Advance
EMI
(7 EMI’s) |
Security
Deposit
(20% S.D. at 14% com quart. int.) |
| Car Cost | Rs.300000 | Rs.300000 | Rs.300000 |
| Finance amount | Rs.225000 | Rs.300000 | Rs.300000 |
| Total Initial Payment | Margin
amount = Rs.70000 Total = Rs.70000 |
Seven
Advance EMI(9879x7) = Rs.69153 Total = Rs.69153 |
Sec.Deposit
= Rs.60000 1 Adv.EMI = Rs.10440 Total = Rs.70440 |
| EMI Amount | Rs.8317 | Rs.9879 | Rs.10440 |
| Sum of balance EMI’s | (36 EMI’s) Rs.299412 |
(29 EMI’s) Rs.286491 |
(35 EMI’s) Rs.365400 |
| Refund | Nil | Nil | Maturity
value of Security Deposit @ 14%com.quart. = (Rs.90664) |
| Total Outflow | (70000+299412) Rs.369412 |
(69153+286491) Rs.355644 |
(70440+365400) (less 90664) Rs.345176 |
| Flat Rate of interest for 3 years tenure. | 7.7% per annum | 6.18% per annum | 5.02% per annum |
The above working shows that the Security Deposit scheme comes out a winner, with the lowest cash outflow. The Security Deposit of Rs.60000, kept with the finance company earns an interest of Rs.30664 in the period of three years (@14% compounded quarterly interest). After getting the deposit back you have spent a much smaller amount of Rs.45176, as compared to the Margin Money scheme, where you end up paying Rs.69412 more over the cost of the car.
FactsThe Interest rate by reducing balance method, for all the above schemes is same i.e. 18% per annum.
The crude method can be easy, but it does not take into consideration the time value of money. All the three schemes have the same IRR (Internal Rate of Return) of 18%, and the method presents a correct comparison, as it takes, both the amount and the time of individual cashflows into consideration. This method accounts for the Rs.2123 you pay extra with every installment in the Security Deposit scheme as compared to the Margin Money scheme
TIP: Use the Flat Rate method to compare cash flows of similar schemes. Comparing a Security Deposit scheme with the more humble Margin Money scheme, using the Flat Rate method, will result in a distorted decision.