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Car Loans – More Than Meets the Eye


Almost 80 percent of the auto sales are financed by loans in India. The car loan rate today is higher than ever before. The car loan rates are as high as 13-14 percent per annum and are set to increase further. However, a hard bargaining can cut the interest rates. Usually the buyer is routed to the banks through the car dealer (new and old), from where a purchase is imminent. The dealers even help in cutting down the interest rate for the buyers’ sake.

Buyers are not aware that it is not the bank that is actually cutting down the interest rates, but the manufacturers, dealers and agents who contribute to lower the interest rate on behalf of them.

A buyer needs to conduct extensive research before going for a car loan. Public sector banks and private banks offer car loans at varying rates (difference in a few basis points also count). But these points can help save a lot of money in the long run. Mostly the bankers or dealers aid to reduce the interest rates by 1 percent to 1.5 percent at the maximum. All banks function under the same base rate that is applicable to each and every loan. Apart from the base rates, banks have a facility where car manufacturers, agents and dealers, can contribute while the buyer gets a loan at apparently reduced rates. This is the benefit that a buyer gets in a competitive market.

Let’s see how the manufacturer, agents and dealers help to reduce the interest rates.

The car manufacturer’s financial aid:

Financial incentives are offered by the car manufacturers to selected lending institutions in order to push sales of their cars. The car manufacturer selects banks that have a wide network and deep penetration across the country. The bank charges fees for providing this service to the manufacturer. In return the manufacturer pass on these charges to the car buyer in the form of car loan.


The dealer discount:

Dealers are the retailers for car in the auto sector. Each of these dealers is associated with different car manufacturer and retail products. Dealers receive incentives on sales when they meet the target of the manufacturers. Car dealers who achieve sales above the target offer higher discounts than other dealer with the same manufacturer. The lending institutions include the incentives in the pricing of the car loan. The lending institution has the freedom to reduce the pricing of car loan. This is done at the behest of the car dealer, who agrees to pay the charges equal to the reduced rates.


The agent’s interest:

The agents are the key people who actually help a buyer to complete all the formalities for a car loan. The agent is the person who negotiates with the dealers for the discounts. The discounts depend upon the number of cars sold from the dealership by the agents. The dealer negotiates the discount based on the contribution made by the agent on the sales performance of the dealership. The agent receives a commission from both the bank and the dealer. Banks have two types of commissions - the standard rate and the incentives on target achievement. When buyer gets agents discounts it is mostly standard commission. By giving away the standard commission, the agent helps to reduce the car loan amount, which in turn affects the interest rates.


All those who are planning for car loans, should draw all information before approaching the financier, so that they can haggle for the best possible price.
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