While approaching the bank every potential customer has atleast some idea of ‘how long’ his relationship with the bank will be for this particular transaction or in laymen’s terms what will be the duration of this loan? This duration for which the customer will ay installment-based repayments to the bank is also known as the tenure of the loan. This needs to be pre-determined and directly affects the amount of each installment as well as the total amount that one pays for acquiring the car (principal+interest).
Usually the banks offer tenures of 1-5years with the 3-5 years being the most popular selection made by the clients. SBP has however allowed consumer lending for automobiles upto 7 years so you can always ask your banker for an extended period which will then be considered as a deferal from norm but still within the approval authority of the bank. My personal advice is that you take either a 3-year plan or a 4-year plan, reason being that the installments for 1 & 2 year plans will be too burdening on your income (especially if you are salaried individual with fixed income) while in case of 5 to 7 year plans you end up paying more than 1.5times the actual price of the car. Let me explain it through some simple calculations:
Assume that the car of your dreams costs Rs. 1million. You pay a quarter of it as downpayment while the interest rate is taken as 15% which is possibly the best one you can get at the moment then your installment per month would be as follows:
Tenure (Years) Installment Amt. Amount paid during tenure
1 Rs.71,875/- Rs.1,112,500/-
2 Rs.40,625/- Rs.1,225,000/-
3 Rs.30,208/- Rs.1,337,500/-
4 Rs.25,000/- Rs.1,450,000/-
5 Rs.21,875/- Rs.1,562,500/-
So a Rs.1million car ends up costing Rs,1.5million in a 4-5 year plan even without considering insurance which usually is around Rs.4,000/- p.m for a car in that price category. Thus you must choose tenure wisely after making calculations as above. Your banker will be more than happy to furnish you with complete repayment schedules for all tenures if asked.
Same is the case with downpayment otherwise known as equity contribution by customer. SBP allows from zero upto 50% downpayment however the baks generally allow plans for 10%, upto 30%. Again this means that you must negotiate strongly with your bank as it will affect the end outcome. Any amount you contribute towards the purchase of the car will reduce the amount provided by the bank thereby allowing total amount of markup to be reduced when downpayment increases. (The more you pay less will be the amount on which you have to pay interest).
Ending as always my suggestion is that you haggle with your bank just like you bargain with your corner-grocery storeman. The more you haggle the better option you will get. Next post will address matters pertaining to insurance.
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