Thursday, September 12, 2013

How Are You Going to Pay for Your New Car?

When it comes to being over 50 and wanting to maintain the same lifestyle as you did in your 30s, budgeting and smart planning are your most important tools in this endeavor. Sure saving some weekly cash is a good alternative when you want to purchase something more substantial, but is that really going to get things done?

Are you interested in buying a car? If you have already chosen the desired model, all you have to think about is finding the most advantageous method of payment. Funding opportunities are own resources, bank loan or finance lease.

Since a car is a perishable good, irrespective of the acquisition, the cost should be minimal, while the ratio between quality and cost should be balanced. Thus, given the fact that “own resources” requires no further explanation, let’s go straight to the other two versions and ask the million dollar question: what is the difference between credit and leasing? Both options involve purchasing property in monthly installments. 

The difference between loan and lease

Unlike a financial lease, in the case of a bank loan, the owner of is the client (user) and the loan is paid in monthly installments (comprising a share of the purchase value of the property - including VAT, interest rate and borrowing fees).

In the case of lease, the owner is the leasing company that transfers the right to use to you, through a rental system, at the end of which, if you paid every installment on time, you will also become the owner of the car.

How’s the car loan market?

According to credit bureau Experian, nearly 85% of new-car buyers in the second quarter signed up for a loan or lease to fund their purchase. And car dealers had a lot to do with this impressive number (the highest since 2006) since they are offering incentives such as low-interest financing. But experts tell us to pay attention since on paper things might not be the same as verbally agreed to, especially with all the unscrupulous dealers out there who would say anything to make a sale.

Furthermore, the guys at Motive Auto Finance warn us about the “unholy” practices of certain auto dealers. They act like a middleman for car lenders. In order to make even more money, some dealers will offer you a higher interest rate than what they are actually paying to the lender. Known as the “dealer markup”, this “bonus” can add an additional 3% in interest, thus increasing the cost of your car. And it is perfectly legal to do so, with only a few states having specific regulations in order to limit how much a car dealer can markup rates.

Pushing for add-on services is no surprise. Dealers will try to sell extended warranties or supplemental insurance, causing your monthly payments to increase. Remember that these products are optional and if you don’t want them you shouldn’t be persuaded in purchasing them. A good idea is to contact your insurance company for further information.

Another thing you should consider is that certain banks are now offering loans at below the RBI-mandated base rate. They have taken advantage of a “grey area”, using special schemes to offer luxury car customers auto loans at 9-9.15%, which is below its base rate of 10%. How do they do it? It seems that banks get around the RBI's base rate stipulation by using two methods: booking the loan at the base rate on their books and booking dealer payouts separately as promotional or brokerage cost.

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