Car dealer tricks

Let me ask you one question, if you have to choose between the following loans for the car which one would you choose:

a) The dealer has a tie-up with various banks who provide you loan at the prevailing rate of 13% for five years and 13.5% for three years. Although it is a huge interest rate (on a reducing interest basis) but its the same across all the dealers of the city. Most banks asks you for a margin amount as a downpayment (something like 10 - 15% of the cost value of the car). The dealer provides you a discount of 10,000 Rs on a particular car model.

OR

b) The dealer has a specific tie-up with a government bank which provides you the same loan amount at 7.75% interest rate for three years. This is almost half of the interest rate in option (a). The dealer does not offer you the discount mentioned in option (a) and all other terms remains same.

Which one you would opt?

Well this is the true fact that came to light when I proceeded with buying a car in the city of Bangalore. I went to the Maruthi showroom (Sagar Motors @ Bannerghatta Road) and inquired about a particular car model. I was told the on-road cost as X Rs. I told them that I want to take up a loan of just Rs 1.4 lakhs and the remaining amount will be as a down-payment in cash (which was way higher than the 10% margin required by most banks). Surprisingly even with so large a cash down-payment there was no special discount. I was told about the exorbitantly high interest rates charged by banks (13% -14%). I went home and talked to few other dealers and everyone came up with the same figures with no additional benefit.

Then one day we got a call from a dealer who said there is a special scheme with UTI bank which will provide loan on an interest of 7.75% for three years. I was ecstatic but was little curious that how could a bank provide me with such a low interest rate when all other banks are charging such higher rates. I asked the details and sure they were providing the loan at aforementioned interest rates, just that the dealer mentioned that he wont give the 10,000 Rs discount for this scheme.

Always do your own EMI calculation

So I got suspicious and decided to calculate the EMI. For a loan of 1.4 L for three years at 7.75% rate of interest the EMI comes out to be Rs 4340, while for a loan of 1.3 L for three years at 13.5%, the EMI comes out to be Rs 4360. In essence both the scheme are more of less the same (just a difference of 720Rs over three years period). It is just a gimmick used by the bank and the dealer to fool the customer with flashing a 7.75% rate of interest. I would suggest do your own calculation everytime.