Auto Loan: Govt Bank vs Private Bank vs VW Finance


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Hi,

A colleague of mine is looking to go for a car loan to buy a Vw vento. He's getting these types of loans-

Government banks
8.70%-8.80% rate in different banks. Sbi's rate is 8.80% File charges around 800-1000 No prepayment or preclosure charges. Interest rate is floating, might be increased or decreased as per Rbi's policy. Banks call it reducing rate though. How is it calculated BTW?

Private banks
7.70%-7.80% rate. File charges around 4500-5500 if preclosed before 25 months then 2% penalty on principal amount. Interest rate is fixed.

Private loan agencies (suggested by sales guy, probably because he's getting a share)
7.40% interest rate. File charges 4500-5000. If preclosed before 25 months then 2% penalty on principal amount. Interest rate is fixed. The concerned said that the auto loan will be from hdfc. But hdfc's rate is like 7.80% when asked he said we have additional powers so rate is reduced. He's not a hdfc employee but he said that all papers where we will sign will be from hdfc, he's just a middleman. He showed few loan approved papers to him according to which he got loans of 10 people approved in 2 days from the back.

VW finance
7.84% interest rate. File charges 6500. If preclosed before 25 months then 2% penalty on principal amount. Interest rate is fixed. They were the least interested people as per him.

Which loan should he select and why? Any hidden charges in private sector?

Thanks
 
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Re: Auto Loan

I'm very poor on this Finance business, but as you have asked a 2nd time, I thought of replying.

I found these links on "auto loan at TAI" from Google search (link). Till members start posting in this thread, you can start searching for answers from above links and the one here.
 
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Hi,

A colleague of mine is looking to go for a car loan to buy a Vw vento. He's getting these types of loans-

Government banks
8.70%-8.80% rate in different banks. Sbi's rate is 8.80% File charges around 800-1000 No prepayment or preclosure charges. Interest rate is floating, might be increased or decreased as per Rbi's policy. Banks call it reducing rate though. How is it calculated BTW?
.......
Thanks
Floating rate and reducing interest rates are different. The floating rate is charged based on changing interest rates in future. If interest rate goes up or down in future, you will be charged based on that rate.
If the Govt banks are actually offering reducing interest rate (also called Reducing Balance Interest/Diminishing Balance Interest), then go for it with eyes closed ! Reducing Interest rate is calculated by reducing the principle amount every month after deducting the paid amount, where as in flat rate, you have to pay interest rate on entire principle amount every month.
As an Example, if you take 4 lakh loan at flat rate of 7.7% for 5 years, you will pay interest of Rs.1,54,000. That is equivalent to taking Reducing Balance Interest rate at 13.64% !! So even if the Govt bank floating rate goes to 13% (very unlikely, rates will reduce in future) , you will save money.
However be very sure that the Govt Bank is giving Reducing Balance Interest loan. If not, just go for the lowest flat rate loan - in your case the private agency. BTW be sure that the pvt agency is not levying large extra charges over and above the HDFC loan and processing charges.
 
Thread Starter #5
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I'm very poor on this Finance business, but as you have asked a 2nd time, I thought of replying.

I found these links on "auto loan at TAI" from Google search (link). Till members start posting in this thread, you can start searching for answers from above links and the one here.
Thanks. Found these two threads and replied there, now waiting for replies
http://www.theautomotiveindia.com/f...0-car-loans-availability-its-hidden-cost.html
http://www.theautomotiveindia.com/f...dvice-purchasing-new-car-loan.html#post556991

Floating rate and reducing interest rates are different. The floating rate is charged based on changing interest rates in future. If interest rate goes up or down in future, you will be charged based on that rate.
If the Govt banks are actually offering reducing interest rate (also called Reducing Balance Interest/Diminishing Balance Interest), then go for it with eyes closed ! Reducing Interest rate is calculated by reducing the principle amount every month after deducting the paid amount, where as in flat rate, you have to pay interest rate on entire principle amount every month.
As an Example, if you take 4 lakh loan at flat rate of 7.7% for 5 years, you will pay interest of Rs.1,54,000. That is equivalent to taking Reducing Balance Interest rate at 13.64% !! So even if the Govt bank floating rate goes to 13% (very unlikely, rates will reduce in future) , you will save money.
However be very sure that the Govt Bank is giving Reducing Balance Interest loan. If not, just go for the lowest flat rate loan - in your case the private agency. BTW be sure that the pvt agency is not levying large extra charges over and above the HDFC loan and processing charges.
Thanks. All the banks here are saying that floating & reducing rates mean the same thing. I should have researched before asking https://www.quora.com/What-is-the-d...rest-rate-and-reducing-balance-interest-rates

- If you check my initial post HDFC, Kotak & other private banks have a less ROI, in some case around 1.15% less and they are offering a fixed rate. While the government banks are offering more rate but it is floating(Let us forget about reducing, because I don't think that they will provide at reducing). Now the rate is more and since it is floating it might be increased or decreased in the future. Which one is advisable here?

- Now comes the question about which we have no clue. I met a guy who took an auto loan from pnb for 5 years. His remaining amount, according to him, including interest was around 200000 at the end of 2 years. Interest was like 25000. He tried to pay 1.75 in one cheque but the bank said that Rs. 25000 was adjusted in the first installment as it had only interest so now he needs to pay the full Rs. 200000. Now the million dollar question here is how to spot if the banks are taking the first installment as interest only or including principal?

- I am attaching the payment schedules given by private banks and few excels which I found on the internet. Please tell me which is correct and which method is followed by the banks to calculate the same. The loan agency also sent one mentioning step down. What does this mean?

- My friend is planning to take a loan of Rs. 15 lacs. For how many years should he take the loan? As per him he will repay the same within a year or two hopefully. He wants to pay the minimum interest to the bank. The bank's rep told him to take the loan for the maximum years which is 7 as interest in the same is less.

Sorry for so many questions.

Thanks
 

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.....
- If you check my initial post HDFC, Kotak & other private banks have a less ROI, in some case around 1.15% less and they are offering a fixed rate. While the government banks are offering more rate but it is floating(Let us forget about reducing, because I don't think that they will provide at reducing). Now the rate is more and since it is floating it might be increased or decreased in the future. Which one is advisable here?
Private bank. From April 2016, Govt bank loans - with some exception- are based on Marginal Cost of funds based Lending Rate (MCLR). current 1 year MCLR of SBI is 7.95. They add their spread to this and give loan. The spread depends on perceived risk of the debtor. Even if the RBI reduces Repo rate by 50 basis point over the years, it is unlikely that MCLR +spread rates will come below 7.7 for medium term period. Note also that MCLR loans are usually based on 1 year MCLR reset, so if you take loan today and MCLR changes within one year due to repo rate change, the interest rate will not be reset. Only the next year's MCLR will be considered. In short, the interest rate will not come down to 7.7 % in medium term.
- Now comes the question about which we have no clue. I met a guy who took an auto loan from pnb for 5 years. His remaining amount, according to him, including interest was around 200000 at the end of 2 years. Interest was like 25000. He tried to pay 1.75 in one cheque but the bank said that Rs. 25000 was adjusted in the first installment as it had only interest so now he needs to pay the full Rs. 200000. Now the million dollar question here is how to spot if the banks are taking the first installment as interest only or including principal?
You should get the amortization table from the bank/loan processor.It will indicate the interest and principle component to be paid very month, including the 1st month.
- I am attaching the payment schedules given by private banks and few excels which I found on the internet. Please tell me which is correct and which method is followed by the banks to calculate the same. The loan agency also sent one mentioning step down. What does this mean?
Excel formulas at best give only an indication of the loan processing schedules. Depending on customer risk profile, banks change the interest and principle component during initial years of repayment. You should rely only on amortization table given by the bank.
- My friend is planning to take a loan of Rs. 15 lacs. For how many years should he take the loan? As per him he will repay the same within a year or two hopefully. He wants to pay the minimum interest to the bank. The bank's rep told him to take the loan for the maximum years which is 7 as interest in the same is less.

Shorter the loan period, lower is the interest, so the loan term should be just over prepayment penalty period. However
if the difference between short term loan and long term loan interest is substantial, you can reconsider.
Based on 7.7% interest rate :
For 15 lakhs loan at 7.7% interest for 2 years, you will pay only 15.4% of loan amount as interest. For 3 years period, you have to pay 23.1% of loan amount as interest. For 4 years period, you have to pay 30.8% of loan amount as interest.... For 7 years period, you have to pay as much as 53.9% of loan amount as interest. Note how quickly the interest component increases for every year of loan period!
 
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