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Why comparing car loan rates can get you a sprained neck

Complexities involved in comparing Car Loan Interest Rates.

Harsh Roongta

14 Aug 2007

Whenever you think of car loans, the one thought that comes into mind is, which banks or DSAs offer the best interest rates. However, best interest rates alone may not ensure that you get the best deal.

This is because interest rate is only one among the many financial factors such as financier's discount, Direct Selling Agent's (DSA) discount, dealer discount and manufacturer's discount. To complicate matters further, many car dealers are now also DSAs for financing banks.

You need to check out interest rates offered by dealer's DSA and independent DSA before applying for a car loan.

Let us look at the complexities involved through an example:

If a car costs Rs 500,000 and the loan is Rs 400,000 and the bank is charging an interest rate of 13.5 % per annum for 3 years, the EMI works out to Rs 13,574. You can use the EMI calculator at http://www.apnapaisa.com/loan/loan-advice-india/emi.html to calculate the EMI.

The bank pays the DSA about 3% of the loan amount as a commission i.e. Rs 12,000. If you are smart, you can get the DSA to pass it back to you as a discount.

This passback can happen in two ways. It can be a cash discount where you continue to pay the EMI of Rs 13,574, but the DSA can pass on some portion of Rs 12,000 as an upfront discount. (Say around Rs 9000). Alternatively, he can build it into the price by offering you a lower interest rate and thus a lower EMI.

Which is better?

In reality, both options are equally good. But since many consumers find it difficult to calculate EMIs, there is a chance that the DSA may not really pass on the full benefit. So, it is always better to freeze the EMI at the lowest quoted by 3-4 DSAs and then negotiate for a cash discount. (See article on how to get the best deal on the car loans)

Additionally, the manufacturers may have declared some cash discount for the car which you are planning to buy. Again, like the discount given by the DSA from his commission, this too can be got as upfront cash discount. Hence, lower the loan amount, higher will be the impact of the discount on the interest rate payable if the EMI reduction path is chosen.

The dealer will sometimes pitch in with the discount for a car out of his margin on the car. This will also have the same impact on the financing as the manufacturer's discount. Most dealers are also DSAs to various banks. There are also quite a few very large car loan DSAs who have developed into multi-brand car showrooms. As far as interest rates are concerned, there should not really be any difference between dealer DSA or an independent DSA. Try both before finalizing your lender.

The best method, of course, is to come to market places like Apnaloan which get different types of financiers to compete for your car loan.