Buying Your Car On Finance – The Complete Guide.

TSIVipul · May 16, 2012

Disclaimer:Neither I am a financial planner nor I am a CA hence before taking any of the steps mentioned it will be better for you to contact your CA/Income tax advocate and then proceed in your financial process.The study has been done considering a married guy having a normal living standard in Delhi. [:)]

Hello friends,are you planning to buy a new car? If yes,then I am quite sure that you are now collecting your relevant documents are are in mood of running to the bank for getting the finance done.

First of all,why finance?Simple it is:-

For paying additional amount.
Income tax issues because your CA told it to you.
You are an investor and invest your own cash and buy cars etc on finance.

Some days back I have done a small survey meeting the managers of some banks and talking them about the condition of car loans now a days and the results of the survey were:-

Most of the people taking car loans over 5 lacs were young employees of private companies.

Most of the guys buying cars above 6 lacs were the private job doers and were young guys.

Most of the guys whose installments halted due to some reasons or financial problems were youg boys from private jobs.

Smallest loans were taken by the government officials and were paid back within 2-3 years of taking.

There was negligible halt in the EMIs paid by the government officials.

Most of the cars taken by the bank were owned by young guys/girls and were not even a year older.

8 out of 10 private employees were unable to maintain the installments regularly.

Most of the vehicles sold and re-loan for smaller cars were taken by the young employees.

Now leaving all that aside,as the thread title says “Buying Your Car On Finance – The Complete Guide.”.What we are going to discuss here is,’what steps should be taken for happy ownership of the car in case you are getting it financed and your finance must never become a load for you’.Now here are some tips for getting the loan and getting it right.The points we are going to discuss are as follows:-

Chapter 1: Plan it out.

Chapter 2: Your set of wheels?

Chapter 3: Do you really need a finance?

Chapter 4: How much loan you need?

Chapter 5: Get your loan insured.

Chapter 6: Status of your bank account must be.

Chapter 7: Which way to go(The bank thing at last).

So, let’s proceed now..

TSIVipul · May 16, 2012

Re: Buying your car on finance?What and how to do..

Chapter 1:Plan it out.

As the chapter name suggests,’PLANNING’ is to be done before anything.As we say “A person who moves ahead without planning finds the problems at his/her doorstep”.

So how does the planning goes on:-

Take out your salary slip in fact the salary slip of spouse too.

Now make a list o all your mandatory monthly expenses like house rent/home loan EMI,school fee of kids,fuel expenses and all and now add 10% to it just on the name of inflation.Now make a list of all your expenses and all and add it up.Now again make a 10% increment in the net sum you have got.Now you have got a sum which can be called your expenses and now it’s the time to get your money which can be spent on your car.

Now,subtract this amount from the salary you people are having on your salary slip and now you will get the amount.

Now,comes the biggest mistake that most of the people do.What the mistake is?People consider this amount as the money they can spend on their car,but the most crucial step comes now.Now you have to divide this amount by 2 and hence you get half of the amount.This is the pure amount which you can spend on your car at most per month including the running,maintenance etc etc.You can only manage this by changing your down payment.Here is one example:-

Suppose you have a salary of 35k and your expenses are about 20k per month and you have 10k as savings.
Now 10/2=5,which means this last 5k is the maximum amount you must spend monthly on the car loan EMI and running of the car.Rest if the amount goes below this limit then it is even better.And the remaining amount is your emergency cash which you may need anytime else let it go to savings which can at the end of the day give you the opportunity to invest and earn from it.

Always remember,the expenses always increases by two folds of that of a single person with addition of a new adult member in family.And by one fold for a kid.

For example:-

For a single guy living in Delhi,the monthly expenses can be about 6k for maintaining a normal lifestyle.
Now Guy+Wife will not be 6+6=12k,but it will become 6+(6+6)=18k for maintaining the same living standard.
And if one kid is added then it becomes 18+6=24k.

So now you people can understand how the expenses can increase unexpectedly after the marriage.Hence before buying your set of wheels you need to do a strict financial planning especially if you are unmarried and are soon going to get married.This will save you from sudden shocks.For keeping it short,here I conclude this chapter. [:)]

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Chapter 2: Your set of wheels?

Well,now you have made your financial planning.So now its your time to select your ride.
Selecting your ride sounds very pleasing and it seems very easy too,but truth is that this is a very complex process.How its is so?Let me explain.Selecting your car means you need to make out three things:-

Your usage and the roads you will be covering.

Type of car you need.

Your budget and the running costs of the car.

Since you have already framed your budget.Let’s take each point one by one.

1): Your usage and roads you will be covering:City driving menas a good hatch.Highway driving means sedan or SUV and if bad roads are to be encountered then SUV.Rest is upon your wish,buy anything you like.

2): Type of car you need:This part consisits the space,equipment,design,power etc etc.While usage covers the way the car will be used,this part covers exactly what you want in your car and what you expect from your car.

3): Your budget and running costs of the car:This is the most crucial part of the decision making and most of the people ignore it at their best.This point consists of your financial planning and how you implement it on your car.Here you have to make the process like the following:-

Mr.A’s family income is 1.5 lac per month.

Now after all the expenditures etc etc he get a net amount of Rs 60k which when divided by 2 becomes Rs 30k per month for the car.

Now since Mr.A has shortlisted a Honda City,so after paying a down payment of Rs.2 lac he got one on a finance of Rs.8 lacs.On the finance of 8 lacs his loan installment will go somewhere like this:-

Let for 5 years,the bank charge Rs 2400 per lac per month.

So for 8 lacs his monthly installment will become Rs 19,200 per month.

His running is 2000 kms per month @ Rs 4.5/km

So his fuel bill will become Rs 9000.

Service charge per service,let it is Rs 5000.

Now since service will be done once in 5 months@per 10,000 kms.

So his monthly service expenditure will be Rs 1000.

Let zero depreciation insurance costs Rs 25,000 per year.

So his insurance amount per month becomes Rs 2083 per month.

Now on adding all Mr A gets his monthly expenditure on car as:-

19,200+9000+1000+2083=Rs 31283 per month.

His saving for car was 30k but since his uplift or downfall is below +-5% so it is acceptable.But if he would have bought a diesel car for the same amount or bought a cheaper car then Mr.A could have been very much happy than he would be now.

So,now I hope you have planned your set of wheels.Hence lets proceed to the another point. [:)]

TSIVipul · May 16, 2012

Re: Buying your car on finance?What and how to do..

Chapter 3:Do you really need a finance?

Okay,so now you know how much you can spend on the car and what car you need for the happy ownership.But main point is,DO YOU REALLY NEED THAT FINANCE THING?

Okay,God created cars for shrinking the world and he created banks for keeping our money at one place,but then evil came in the head of some men and they created finance.

What is finance?It is a simple procedure in which the bank takes advantage of the situation of a person.Or as we say in Hindi Majboori ka faayda uthana.What these situations may be:-

1):Not enough money for purchasing the car.

2):Enough money for purchasing the car but CA has already warned about the income tax devils.

In case of first situation,no doubt you need to get the finance as there is no other way in your hand.

Coming to second case,I’d recommend you to **** the income tax department their own way.Many of you guys may be filling the ITRs and for that ITR you people obtain your copy of FORM NO.16(A) from your office itself if your tax is deducted by your employer itself you’re your CA can get its copy for you.Here is a FORM NO.16(A) to give you people an idea about it:-

The form displayed above is of the businessmen or the people who file ITR quarterly.At the end of the income column you people will find the sum or say the income of that quarter and similarly in the next table is the income tax deducted in that quarter and sum is at last.This is all your white money or say it is the money on which you people are paying the taxes(definitely for every businessman it is half of the earning or even less) and if you have paid the income tax on this money.

Now have a look at your income on which you have paid the tax.If your yearly income is higher than the price of the car then you can easily buy the car for cash.

If more than one member is earning in the family and family is paying the tax as a HUF(Hindu Unified Family) and the net total income exceeds the price of the car then also you can buy the car for cash.

In case every member is paying the tax but independently then if the car is to be bought on the name of one member then he/she can buy it for cash only if his/her income is higher than the price of the car else he/she will have to take some money as a gift from another partner.Or say give cash-take cheque style of converting your own money into gift.Else get the finance for your car.

Now before proceeding as per my words and becoming mad looking at your FORM NO.16(A),it’s the time to act very much sensibly and run to the office of your CA/ITR Advocate.Why?Because ITR means ‘Income Tax Return’.In your Form no.16(A) was your income on which tax was deducted and the tax.But now comes the wicked mind of you and your CA into action and you people hide a lot of tax by many methods like Home loan EMIs,Bills,School fee of kids and many more expenses which further reduces your taxable income a lot.And then a notice is sent to Income tax department that your taxable income was not that much and hence return the excess of money the government has deducted in form of income tax from your income.

Now if the price of the car is lower than this income then only you can buy your car on cash else its finance and that’s the only reason most of the businessmen buy bigger cars on finance and smaller ones on cash.Here is a small example:-

Mr.B and his wife want to buy a Wagon-R VXi on cash.
Their yearly income is 6 lacs and the car costs 4.5 lacs.
So they decide to buy it on cash.Then they go to their advocate/CA for the advise.And then everything goes on this way:-

As per CA,out of their 6 lacs their expenses shown are as follows:-

1 lac as home loan installments.

1 lac as other expenses.

30k as insurance premiums.

15k as children’s school fee etc.

This way the CA cuts on total 1.5 lacs form Mr.B’s salary and 1.75 lacs from his wife’s salary and then finds the taxable income as:-
6-(1.5+1.75)=Rs 2.75 lacs.

Now since their taxable income is far lower than the price of the car,hence they can’t buy the car for cash.Instead they can pay a maximum 2.75(in fact just 2)lacs as down payment and take a loan of at least 1.75 lacs for the car.

And always remember as per Indian Government,the car is never considered as a need,INSTEAD YOUR CAR IS CONSIDERED AS AN EXPENSE DOEN USELESSLY(Shauk ki cheez in Hindi) and hence you never get any income tax benefits on car loan nor its involved in your expenses.

Well,I hope you people have got the point,so let’s now move to another point. [:)]

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Chapter 4:How much loan you need?

Well,we have already discussed this point in chapter 3,but still let’s move on it quite deeply.

Okay,so now your CA has strictly ordered you to get a loan of some xxxxxx amount.Now its your work to again make a financial planning.Or say further refining your financial planning that you did before starting the whole process.

Now you have choice to take the loan of exactly the same amount which exceeds your taxable income or be quite lower on the amount.I’d advise you to be at least 25-33% below that amount.Why?Because income tax people are such goons that by mistake if you bang with one then he will simply ask just one question:When the taxable income is just 2.75 lacs and other all is expenditure.And you have filled all your saving income in car’s down payment then how are you now affording your expenses.Although its easy to get rid of this issue but who want to get involved with those bribe-addicted fools?

Okay so now you pay the down payment and if you wanna get rid of the loan soon then pay it back completely in either next financial year as that time you will again have same amount as savings or let it continue.But remember this loan won’t give you tax relaxation.

Now let's move ahead.. [:)]

TSIVipul · May 16, 2012

Re: Buying your car on finance?What and how to do..

Chapter 5:Get your loan insured.

It is the most important point to remember while getting a loan.

You are insured,your house is insured,your car is insured,your health is insured..then why isn’t your loan insured? [frustration]

I mean you have got risk cover for your life,health,home and car then how can you leave this liability without any risk cover?If something goes wrong then this loan will get converted into a disaster for you and your family.If you want to keep yourself safe from it then get your loan insured.

What is loan insurance?

Loan protection insurance, or loan payment protection insurance, is a form of payment protection insurance. This type of insurance can help you protect your monthly loan payments if you become unemployed or suffer an accident or sickness.

Loan protection insurance will typically be used to protect a home loan, car loan or even sometimes personal loans.

Under a loan insurance cover, the lumpsum amount reduces as the outstanding loan decreases as per the loan schedule.

What are the benefits of loan insurance?

Loan insurance means during tough times, you'll have an insurance cover to take care of the EMIs or of the outstanding loan amount. This is especially useful:

In case of death or disability due to an accident or sickness.

In case of loss of jo.

This effectively reduces the burden on your family in case of any unfortunate event that occurs with you. They would be saved from the financial trauma of paying off the loans.

In cases of a joint loan application, a joint loan insurance plan can be taken which will effectively cover you and your partner.
Both will have the reassurance that if either of you should be faced with redundancy, illness, have an accident or even die, your repayments will be made for you.

What kinds of loans are covered under such an insurance schemes?
Loan insurance is offered mainly for home loan borrowers. However, some banks offer loan insurance for personal loans as well as auto loans.

Do I have to pay any premium for such insurance? If yes, how much?
Like any insurance you do need to pay premium for the insurance. There are only a few banks which offer this kind of insurance without any premium. Premium amounts usually vary from bank to bank and depend primarily on:

The age of the person taking the loan: The premium is usually higher for older people.

The loan amount: If the loan amount is high, the premium payment will also higher owing to the fact that the bank has a higher liability in such cases.

The tenure of the loan: If the repayment period is longer, the premium to be paid is also higher.

The medical record of the individual: If your physical health is good, the premium amount comes down. However, if you are suffering from any kind of serious ailments the premium amount will go high.

What are the things to keep in mind while checking about loan insurance?

Loan insurance is something that you need to give careful thought to. You need to check:

What does the loan insurance cover? Does it cover death by accident or death by any cause? Does it cover temporary disability only or does it cover permanent disability as well?

Eligibility for the insurance. Check out the eligibility criteria for the insurance. Check whether the loan needs to be of a certain amount.

Payment of premium. Check whether you can pay the premium as part of the EMI or does it have to be made as a lump sum amount.

Is a medical check-up necessary? Check whether a medical checkup is necessary in all cases.

Are there any tax benefits because of the insurance being a 'life insurance' scheme?

Yes, there are tax benefits that you can get with such kind of insurance. Since you are paying a life insurance premium, you can get deduction under Section 80C. However, if it is clubbed with your EMI payments, you will not get the insurance benefit.

If you haven’t yet got your loan insured then get it done today itself.Now let’s move to another point.Last two small chapters. [:)]

TSIVipul · May 16, 2012

Re: Buying Your Car On Finance – The Complete Guide

Chapter 6: Status of your bank account must be…

This chapter is based on the savings part and your emergency savings.

If you are taking a loan and its better if you are always ready to face any situation like halt in salary,over expenses etc.For tackling your this problem your best friend can come to rescue you.

Who this best friend is?This best friend is your own cash.This is the cash you have been saving and have in your bank account.Now if in any case you are unable to pay the installment for a month or two for any reason which is not covered in your loan insurance like halt in salary or over-expenses,then your saved cash comes handy.

Hence I recommend higher the saved cash is,higher will be your personal security.Now let’s move to last and very small point.. [:)]

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Chapter 7: Which way to go?(The bank thing)

First of all you people must remember that every bank wants to give as much loans as possible.In other words its not the bank who is not willing to give the loan,instead its our financial status or other issues whish forces them to refuse our loan.

Now since you have decided your car,you have planned your finance,you know hom much loan you want and you have to get it insured too.Now let’s move towards the bank.

First question that comes in the mind at such times is,Which bank,private or government?

Here first of all let me tell you a minor difference between the two:-

In private bank you will feel that everything is going on according to you.

The staff will be extremely helpful and your loan will be passed within a day or two.In fact you don’t even need to go to the bank,their guys will come to cut you at your home itself.

In Government banks,there is a feel like everything is going against you.

Be thankful even if the staff attends you in a nice and pleasing manner.They can take weks in passing your loan too and yes,there is no chance of them sending a guy at your home.You yourself need to go to them everytime.

Still I recommend you guys to go for the government banks.Why?

Because they won’t sweet talk you but will give you just a transparent deal without any hidden terms and conditions.And amazingly the private banks are your friend before you take the loan and become devils at any fault form your side after you took the loan while Government banks are not your friends before you take the loan but slowly they will make the friends out of you and will understand your problems too.If any.
Hence I’ll advise Government banks any day..

That’s all guys,I hope all your queries have been cleared,rest for any pending ones..I am waiting to hear them.But what I can assure is that if anyone follows these small 7 steps then at least the person can never suffer in terms of a loan. [:)]

Thank you..

point_city96 · May 16, 2012

Nice article Vipul!

I have a question:Did you mention about the two types of loan("flat" and "diminishing")?I think government banks offer "diminishing" loan and most of the private banks offer "flat" loan,but I think there are private banks which offer "diminishing" loan.

TSIVipul · May 16, 2012

Naa,I haven't mentioned it.Why?Because depends on the loan taker.whatever he/she wishes.
BTW,before praising,have you read even 1/4th of it?

point_city96 · May 16, 2012

Re: Buying Your Car On Finance – The Complete Guide.

TSIVipul said:

I have read completely.When I first opened the thread there was only one post and then you completed it.but I din't try my maximum to study the picture(form) though.

mukeshus · May 16, 2012

Re: Buying Your Car On Finance – The Complete Guide.

In future i would like you to be my Financial Planner. [:)]

Well detailed and well written Vipul.

Rating 5 stars from my end.

TSIVipul · May 16, 2012

Re: Buying Your Car On Finance – The Complete Guide.

point_city96 said:

Haha,you did it quite soon..
So any other query or doubt buddy?

mukeshus said:

Aah,that's like an offer for me,even I'd also like to work for a cool minded person like you.Even I too sometimes think of withdrawing engineering,but then why not let it complete?

You passed it,that means the thread passed the exam.Thanks a lot buddy and not to forget that repo. point I got..... [;)]

TSIVipul · May 17, 2012

Re: Buying Your Car On Finance – The Complete Guide.

point_city96 said:

Buddy you will be shocked to hear that in India you can't get the diminishing type of loans.
Instead here are of two types:-

Fixed interest rate type:In which interest rate is fixed throughout the term of loan.
Floating or variable interest rate type:In which your interest rate changes with the interest rates issued by RBI.

Both Govt and private banks offer both type of loans.

Iron Rock · May 17, 2012

Re: Buying Your Car On Finance – The Complete Guide.

Vipul by far this is your best piece of work ( i say its your master piece ). I very humbly salute the amount of effort you have put in to it - Kudos for taking the effort!

Rating the thread a well deserved 5 stars!

Can you also please highlight the prevailing car loan interest rates for us financial donkeys ? :stupid:

jalex · May 17, 2012

Re: Buying Your Car On Finance – The Complete Guide.

Iron Rock said:

+1 on that Iron Rock. I too am giving this thread all the five stars.

Good work Vipul [:)]

.

TSIVipul · May 17, 2012

Re: Buying Your Car On Finance – The Complete Guide.

Iron Rock said:

jalex said:

Thanks a lot guys.Now it looks like the thread has covered all its aspects.

@Iron Rock,here is the table of interest rates(Since I don't know how to design a table hence snipped one directly from net):-

ERTIGA_ZMR · May 21, 2012

Re: Buying your car on finance?What and how to do..

TSIVipul said:

Vipul, please accept my bow, this is the awesom work .If there is option to rate 10 of 5, I could have selected :).

I have a query, buying a car on cash plus cehque. In couple of months, I will be getting delivery of Car- ERTIGA ZDI. My plan is like 2.0 lakhs from my saving RD- salary account. 3 lakhs from my wife salary account. 2 lakhs from Dad, that too his savings retirement money or bonds.3 lakhs from in laws (on loan - intrest free [clap]

).Rest all from my PF money from previous employement. So I can show 7.5 lakhs as cheque and rest I am planning to buy in cash. Is it advisable to do so?

I am not planning to burden myself with any car loan as there is no additional benefit as home loan has.My and spouse income is sufficient enough to meet the monthly expenses of car. Just let me know is there any legal issue or anything from IT. We all are paying IT and all money are accounted.

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