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How to pick the right scheme for repayment of car loan

How to pick the right scheme for repayment of car loan

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Car loans in India have become explosively popular in the past few years with financiers creating more innovative loan products each year in an attempt to lure more and more customers. There are several kinds of customised car loans available in the market, meant to suit different requirements of the borrower.

In addition to the various types of car loans one can avail today, also available are several options to repay a loan. Most of us are not aware of a variety of ways in whch one can wrap up a car loan.

Applicants must learn about various methods available to them at the time of signing a loan agreement with a financier. Today, multiple schemes exist for the repayment based on the kind and degree of convenience involved.

Discussed below are six types of loan repayment methods one may choose from:

  • Regular EMI: This is the most common type of repayment option people avail today when it comes to car loans in India. In this option, a fixed rate of interest is decided, based on which EMIs (equated monthly instalments) are calculated for the entire repayment tenure. Interest rates are the lowest in the regular EMI option. Instalments can either be paid in the beginning of each month, called 'monthly in advance', or at the end of month, called 'monthly in arrears'.
  • Step-up EMI: In this arrangement, the amount of EMI increases during the term as the repayment progresses from being lowest in the first year and increasing steadily thereafter. The interest applicable in this option is higher than that in the case of regular EMIs. Customers choose this option to have a lesser burden initially and then slowly get used to higher EMIs as their income increases.
  • Step-down EMI: Unline the step-up EMI option, here the EMI reduces gradually from being highest at first. Though the interest rate with step down EMIs is higher than that in the regular EMI mode, total cost may be lesser as the principal amount is paid back sooner.
  • Balloon EMI: In this method, there is provision of paying a lump-sum amount up to 20 per cent of the principal at the end of the repayment tenure. Though the rate of interest chargeable in this method is higher than in case of regular EMIs, it reduces the initial burden on the borrower.
  • Special tie-up: Often referred to as 'super saver tie up' method, this option ensures maximum benefit for the borrower as the financier here has a tie-up with the bank the borrower uses. The arrangement is such that whenever there is additional or excess money in the account, the same is used for an out-of-turn payment of the car loan. This helps reduce the principal earlier resulting in substantial savings in the total money paid out in the long-run.
  • Lease and refinancing: This is a rarely used option where the borrower pays the financier an EMI equivalent to lease charges of the vehicle and then at the end of the repayment tenure gets the option of paying current value of the car.

Each customer has a different set of financial considerations based on which he can find the most suitable option for his car loan. However, having a thorough understanding of various options available in the market makes it easier to take a more beneficial decision.

Disclaimer: BankBazaar.com is an online loan marketplace. 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: February 22, 2014 14:33 (IST)

Tags: Car loan repayment, Bankbazaar.com, Car loans

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