Considering offers of financial schemes of Car markers like No EMI, Buy Now Pay Later etc., you must be induced to buy a car as need may also be felt due to Covid-19. But it must be noted that First and foremost Rule of Business of Lending is that it is the customer who will bear the cost for everything be it money, be it time for which money is used, and for that matter even the Paper cost of lenders is also recovered in processing cost etc. So, Golden Rule in Personal Finance for every individual is that one should not borrow as per compulsive need of the product but as per the “capacity to repay” and discipline otherwise it may push you towards Debt Trap.
For video Explaination.
Today, every automobile company is announcing lucrative or inducing finance schemes like No EMI till six months, only EMI of 4999, Buy Now Pay Later, Step-up EMI, Baloon EMI etc. But it should be noted that these are not discount schemes but only a financial facility for which customer will bear the cost not the Car Makers.
Cost of these facilities will be in the form of interest cost and other associated costs which may even be at a rate higher than market rates. Further, it should also be kept in mind that interest cost during the period of Relaxation ( non payment of EMI etc.) will itself become part of your loan and then you ended up paying interest on the interest of relaxation period also.
In this article, we will explain these schemes in detail, and will try to give you a handy check list which will guide you while taking these important financial decision.
Let’s First understand meaning of every Financial scheme and their related financial costs:
No EMI for Six Months : In this scheme, customer will be given relaxation of not paying EMI for first six months, but interest will continue to accrue for six months and will become part of your loan. For instance you took loan of Rs.10 Lakhs at 10%, then interest for first month of relaxation will be 8,333 (calculated on 10 lakhs) which will be added to your loan amount so interest for second month will be calculated on 10.08 Lakhs. Similarly at the end of six month your loan amount will become Rs.10.52 Lakhs on which you will pay interest from seventh month.
Buy Now Pay Later: is just another Name of EMI moratorium or No EMI scheme.
Only EMI of 4,999: In this scheme, customer is offered to pay EMI of just 4,999 for initial some months, then enhanced EMI is required to pay after relaxation period. In this scheme, it is most likely that customer is just paying interest cost of loan and no payment towards principal of loan. So, loan amount will be same as of first day till the time you step_up your EMI. For instance, for a loan of Rs. 6 Lakhs at the rate of 10%, interest cost is 5,000 per month. Further, it may be noted that if EMI of 4999 is not able to cover interest portion, the remaining interest will be added to loan just like EMI moratorium.
Step_Up EMI : Above scheme is an example of Step_Up EMI, in which you pay less EMI in initial period and big EMI in later period to compensate early period.
Baloon EMI : In this, customer will be given the option to pay less EMI during the tenure of loan and a large lumpsum payment at the end of tenure of loan like 25% of loan amount at the end of 5 year in a single installment. In this one must evaluate whether he will be able to pay such lumpsum payment in one go.
By reading, above explaination of financial facilities, you must have understood that these financial facilities will be very dear to you in terms of financial costs. So we present following check list which may protect you from these kind of deception:
EMI schedule should match your Future Income: It should be noted that early period of relaxation or comfort will required to be compensated by huge outlay or pain in future. So, you should be doubly sure that your income in future will be able to deal with this enhanced payment towards loan repayment. Otherwise it will push you towards debt trap, financial and psychological stress besides destruction of credit history.
Rate of Interest: “Here you will find big catch. “These car companies will only talk in absolute numbers like EMI of only 4,999 etc but they will try their best to hide rate of interest in percentage terms. so, first thing you should enquire is what is rate of interest of your loan and compare it with market rates.
Option of Early Ending of Relaxation Period or Pre_ Payment Facility: It may be possible that at present you are strech out of your finances, but same may not be the case after sometime. So, you may want to start your EMI at an early time. So, you must enquire about this and also enquire about pre payment facility in your loan along with associated cost if any.
Processing Fee and Other Hidden Costs: As these financial schemes may be offered by car makers in association with NBFC or Banks which may charge exhorbitant processing fee and other hidden charges for these facilities..So, you should compare these costs with market practices.
We hope that we have covered every aspect of different financial schemes offered by different car makers and their related financial costs along with comprehensive check list to protect your Interest.
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