How to buy a Car (Basic steps for buying a car) - Step# 2: Payments (How do I decide on payment terms for buying a car)

Hello Readers,

In the previous blog, I discussed about the step#1, i.e. on various pricing factors and finalizing on a dealer.

In this section, we would go over the payment related steps. Let me break that into smaller units of activities and then detail on each of them.

The activities are:

1. Initial Payment (not the down-payment)
2. Loan vs Down-payment
3. Loan Tenure
4. Choosing the Banker
5. Car Inspection
6. Down Payment
7. Final Payment

So, let us discuss about all these points in details.

1. Initial payment

This is a token money for booking the car, typically in the order of Rs 5000 to Rs 15,000. It surely depends on the car make and model. Please note, this is the booking money and not the initial down-payment.

Whether the car has any waiting or not, you should not pay anything more than the booking money. Please ask what is the return policy and tell them you might ask for a return in case of any issues you might face financially or otherwise.

Take the receipt and preserve that.

2. Loan vs Down-payment

This is a financial decision. Nowadays, we prefer to take a loan, rather than paying upfront. But please calculate the amount of interest you would pay overall. If you get 8% on a fixed deposit, you would end up paying 10% on the car loan. So you are losing 2% on the interest part for the loan. However, you are preserving liquid cash with you. So you have to carefully take a decision how much you would pay as the down-payment and how much you would go for bank loan.

3. Loan Tenure

The typical loan periods are 3, 4, 5 and 7 years. Shorter the period, higher the EMI and smaller the total interest paid; on the other hand, longer the period, smaller the pocket pinch, but higher the total interest paid.

Example:

Loan Amount	Annual interest	Loan period in months/years	EMI	Total Interest Paid
1 lac	10%	36 / 3 yrs	3,227	16,162
1 lac	10%	48 / 4 yrs	2,536	21,740
1 lac	10%	60 / 5 yrs	2,124	27,482
1 lac	10%	84 / 7 yrs	1,660	39,450

So, you see, the longer period you choose, you end up paying more as interest over the entire tenure. But there is a catch. What if you can repay a part of your residual principal amount in one or multiple terms? That way, your EMI remains low, but you sure end up closing the loan account much quicker and end up paying less interest amount overall. But this facility is given by the bank and that’s our next topic.

4. Chose the Banker

Every dealer has one or more bankers. At the same time, they have one preferred banker as well. As soon as you spell out that you need to take a loan, they would connect you with their preferred banker’s agent.

Please understand, it is good to have a chat with that fellow, the agent, but you are no way required (or bound) to take loan from him or his bank.

Never sign a document, unless you are 100% sure of the bank, the branch of the bank and loan amount.

Whenever you are taking to an bank agent for loan, please ask these questions:

1. What are the possible loan tenures? Or do they offer car loan for 5 years or 7 years etc?
2. What is the loan interest percentage? Ask for the EMI amount for 1 lac for 3 years or 5 years for quick calculations
3. What are the part payment options available?
1. Can you make a part payment within first six months?
2. Can you make a part payment after six months?
3. How many times can you make a part payment in a year or within the entire tenure?
4. Is there any penalty associated for making a part payment?
5. At times there is a locking period of 2 years, that means, you are not allowed to make any part payment within the first two years of your loan disbursement date.
6. At times there is a restriction that you can pay 25% of the residual principal amount in one financial year without any penalty, but anything more will be charged at x%
7. At times there is a restriction that you are allowed to pay only one time in one financial year
4. What is the foreclosure charge? Is there any lock in period?
5. What are the charges and procedures, if you need to sell your car before loan closure?

In all these questions, you will hear lots of penalties. Please spend time to note them down and go over them, so that there is no confusion. You may win a lottery and pay up your loan or you may need to sell your car, for a better car or any other reason. So you should know all the policies and penalties associated with them.

Apart from private banks, please talk to state bank and other nationalised banks. They are equally fast in processing and customer friendly.

You should have a very clear understanding of your bank policies before you finalise on the loan.

Branch of the bank also play a role. Due to the people you are interfacing with, or your relationship with the branch, your queries are answered satisfactorily with illustration or otherwise. Choose a branch, which probably would service you better and faster!

Documentation requirements are typically the same - photo ID proof, address proof, income proof, bank details, existing loan details etc. With your PAN number, they can pull your Aadhar Card and CIBIL score, which has all the details.

All banks, whether nationalised or private will process your loan in two to three days based on your credit history.

As part of the loan sanction process, the dealer would send a copy of price of the car (variant you have chosen), you may take a photo-copy the same for your reference. Once you sign all the bank documents, bank will process the loan and sanction note will go to the dealer. Dealer will inform you the same and probably will ask you to make the down-payment.

But wait! Please do not pay it unless you see and inspect the vehicle allotted to you! Once you make the down-payment, the dealer will send that receipt to the bank and the bank will disburse the loan amount to the dealer directly. So wait!

5. Car Inspection

This is a critical part. After payment of the booking amount, please ask the dealer for an inspection of the car. There could be three scenarios:

Scenario 1: The model/variant/colour is available with the dealer readily, typically in his basement or in a garage space near the showroom. So the car is ready for inspection.

Scenario 2: The model/variant/colour is available with the dealer in his stockyard, which is typically little far off from the showroom. In this case you visit the stockyard to inspect the car.

Scenario 3: The model/variant/colour is not available with the dealer readily. In this case there could be a waiting period or the dealer is going to order the car from the manufacturer. The car would come in the big trailers and land in dealer’s stockyard. In this case also, you may need to visit the stockyard to inspect the car.

While you go for an inspection, please ensure the following:

1. Inspection should to be done in clear daylight
2. The car exterior should be clean so that you can identify any scratch mark or dent

3. Should have the car keys so that the car can be started

4. Permission to drive the car yourself - this may not be possible if you are visiting the dealer stockyard

5. Please have at least 30 - 45 mins for the inspection (only for visual inspection. Test driving will surely take a longer time)

I will try to publish a complete and thorough list of items and activities that you should perform as part of the inspection check.(You can also google it)

Please note down the VIN of the car and ensure you are getting a brand new vehicle and not an old one. Please google to find out how to decode the VIN for you make and model to find out the manufacturing month and year. It is important to check when you are buying a car in the first two-three months of the year.

You should be absolutely sure of all the parts and features of the vehicle before making the down-payment.

6. Down payment or part payment

Once you are okay with the inspection of the car, you may go ahead and make the down-payment. The dealer would then send the receipt to the bank for getting the entire amount.

7. Final payment

Once the dealer gets the final payment from bank or from you, he sends the car for temporary or permanent registration. If your residence is not under the jurisdiction of the same PVD of the dealer, a temporary registration will be made. After the temporary registration, a number with T will be allotted to your car. It is not advisable to drive (long drives) with temp registration, but you may do if it is absolutely necessary.

The permanent registration will be obtained from the PVD of your residence address.

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