Celebrating with a car buy? Beware!

With banks coming up with a slew of festive offers on car loans, it may be quite a daunting task to pick the cheapest loan for your dream car.

The beleaguered automobile industry, reeling under falling demand and a slowing economy, is also pinning hopes on festive season sales to bring the much-needed cheer and have lined up a series of new launches to woo customers.

The industry has lined up a series of launches, from small and compact cars to mini SUVs and sedans are launched.

The current likely festive line-up includes Alto800, Mahindra Mini Xylo, Ford EcoSport, Chevrolet Sail, Tata Manza CS, along with Hyundai Elantra, the new Tata Nano, and Hyundai Eon.

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What's on offer?
India's largest lender State Bank of India (SBI) has cut its processing fee on auto loans by 50%.

So the processing fee has been reduced to 0.255% from 0.51% for all loan amounts, subject to a minimum of ₹ 510 and a maximum of ₹ 5,100.

If you take a car loan of, say, s. R10 lakh, you will save ₹ 2,550.

Bank of Baroda has come up with an offer for its existing customers of home loan and they will get an additional concession of 0.25% on a car loan.

Vijaya Bank has cut interest rates on car loans by 30 basis points (bps) (100 basis points is 1 percentage point) and car loans will be available at 11%.

Corporation Bank will give a concession of 0.25% in interest rate for vehicle loans, if the borrower avails both home and car loans. There will be no processing fee charges till November 30.

Uco Bank Ltd has also come up with a combo offer where the bank has waived off processing fee on car loan in case you take both home and car loans.

Syndicate Bank is giving car loans at an interest rate of 10.75% for a period of 84 months and financing up to 95% of the cost of the vehicle's on-road price.

How to choose?
The most basic thing to do is to zero in on car loans with the lowest interest rate, while keeping an eye on the processing fee.

For instance, in case of a ₹ 10 lakh car loan for five years, an SBI customer will save around ₹ 5,000 compared with a Syndicate Bank customer, because of the 25 bps difference in interest rate even though SBI has a processing fee and Syndicate Bank doesn't have one.

Look at prepayment penalty. Most auto loans impose a penalty, usually a percentage of the outstanding loan amount, if you prepay the loan.

Consider this cost if you think you would be in a position to prepay in the near future.

Some banks such as SBI, Bank of Baroda and Corporation Bank don't have a prepayment penalty.

Watch out for
Assess affordability. Just because banks are offering attractive deals, you shouldn't start looking out for a loan.

For example, most of the offers are a combination of home and car loans. Bearing two equated monthly installments (EMIs) may burden you.

'A concession in the rate or a waiver on processing charge is not an adequate reason for taking a car loan,' says Veer Sardesai, a Pune-based financial planner.

'In case of combo loan, home is an asset so taking a home loan makes sense. However, a car loan is a liability which you take for a depreciating product. You should go for the combo offer only if you are comfortable with the total EMI outflow.'

Look at the cost of financing. Unlike home loans, banks sometime finance up to 100% of the vehicle cost.

For example, HDFC Bank gives 100% of the cost of the vehicle. If you are not in a state to pay a lump sum amount, but still aspire to own a four-wheeler, you may want to look at it, but this would also mean bearing that high an EMI.

'Financing up to 100% of the cost of the vehicle is a high-risk loan for a bank,' says Suresh Sadagopan, a Mumbai-based financial planner.

'Hence, it will be a costlier one for the consumer. Also, the bigger the loan amount, higher will be the interest cost. If you can't afford to pay a lump sum amount in the initial stage, it would be better to reconsider your decision.' You may be better off postponing your decision in that case.'

Happy driving!