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Car loans: Avoid these freebies that cost you more

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In an all-out attempt to woo customers, financiers are coming up with many different attractive offers and discounts of car loans and purchases, which have been largely successful in increasing the actual sales in the past few years. Customers, however, are at times unable to fathom the real financial implications of the incentives being offered, sometimes ending up with bad deals.

While some of the freebies that are offered along with car loans do really provide good degree of relief, many of them often have no financial implications and are mere marketing tricks.

What is on offer?

There are several kinds of freebies offered for car loan customers, which have inputs from the manufacturer, dealer as well as the financer. These freebies are in terms of free servicing, free accessories, free insurance, cash discount and lower rate of interest.

Free Servicing: This is an age old trick that dealers offer with a promise to provide free servicing beyond what is delivered by the manufacturer. But these promises should never be the premise for taking a car loan. There are many hidden costs involved, which will keep draining your pocket.

Free Accessories: Many dealers as well as financiers are offering certain accessories as free with a particular type of car loan. One has to weigh the cost of the accessory vis-à-vis the cost of repayment of the car loan at the stated rate of interest. By providing a music system worth Rs. 5000 the dealer may actually lead the customer into taking a loan with a higher interest costing him Rs. 20000 more in the long run.

Free Insurance: There are offers of free and Rs. 1 insurance cover being promised by financiers and dealers. The trick in such offers is to check the actual IDV (Insured Declared Value) and the cover of the policy. Ideally, the IDV should be as close to the original price in the first year and not less than 15 per cent depreciation in the second year of the car.

Cash Discount: Some of the cash discount being offered by car dealers are really good and work out to be beneficial to the customer in the long run. This discount can be availed on the down payment amount which the customer has to make before availing the loan. Such discounts can substantially reduce the burden on the customer at the time of the purchase. Additionally the cash discount may work out better than lower interest rates in real terms. For example: on a Rs. 4 lakh loan for 5 years at 12 per cent interest, the EMI will come to Rs. 8810. But if the dealer gives a discount of Rs. 25000 then this amount, when adjusted on the EMIs, will bring it down to Rs 8,259. This brings down the effective interest rate of the car loan to 8.8 per cent, much lower than the offered 12 per cent.

Lower Interest: This is a grey area where the customer has to work out the exact amount he repays by taking into account all additional expenses as charges and fees along with the EMIs paid in order to verify the actual utility of the lower rate.

 

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: December 29, 2012 20:17 (IST)

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