Car Finance: Car finance comprises the different financial products which allows someone to acquire a car with any arrangement other than a single lump payment. The provision of car finance by a third party supplier allows the acquirer to provide for and raise the funds to compensate the initial owner, either a dealer or manufacturer.
APR: “Annual Percentage Rate.” It is the annual rate of finance charge you pay for your loan or credit line. For car loans, APR is the rate you pay that accounts for your interest charges plus all other fees you have to pay to get your loan.
Monthly Reducing Balance: In the case of monthly reducing balance method, the principal gets reduced at the end of every month and the interest is calculated on the outstanding principal at the end of the month.
Margin Money Scheme
This is the by far the most popular mode of car loan in which the customer is required to pay only a small margin (usually 10% of the cost) along with a cheque towards the first EMI on the loan. The balance of the EMIs is paid through post dated cheques that the customer deposits with the financiers. This scheme has the lowest car loan EMI as compared to the other options.
Security Deposit Scheme
In this scheme the customer has to make a deposit of a stipulated amount of money with the financier as a security. This deposit amount is refunded to the customer at the end of the loan tenure or in case of any intervening foreclosure of the loan. This deposit also earns a fixed interest which in most cases is lower than the interest charged by the financier on the loan amount. Typically this amount ranges from 20% to 30% of the along amount. However the EMIs paid through this scheme is higher than most of the other schemes. Typically such schemes are opted for by self employed people who do not gave guarantee of salary.
Advance EMI Scheme
In this scheme the customer is provided with 100% of the cost of the car as loan. However the customer is required to pay up 5 to 10 advance EMIs at the time of the disbursement and give the remaining EMIs through post dated cheques catering for the entire tenure of the loan. Though the financier provides full value of the car as loan, the customer is made to pay money as advance EMIs upfront in this scheme. Additionally the interest charged is higher as it is applicable for the full cost of the car.
Hire Purchase Scheme
In this scheme an agreement is made between the financier and the customer by which the customer gets the car on hire with an option to purchase it at a later stage. This scheme is offered by the Non Banking Finance Companies who are not permitted to provide direct loans otherwise. A small token amount called the option money is charged to the customer at the time of taking the car on hire.
Lease Financing Purchase
In this variant the customer and the financier get into an agreement wherein the ownership remains with the financier while the rights to use are retained by the customer. This scheme is popular between NBFCs and corporate bodies who find the arrangement mutually beneficial.
It is important to realize that your interest rate is not the only factor that affects the total amount of interest charge you pay for your car loan. Your car loan term length plays a major role in how much you pay for your car no matter what interest rate you have. As a general rule, for the same interest rate, the longer your term length the more your cumulative interest charge will be.