Buying Car on Loan: Margin Money increased

Few weeks back, we has reported that for Auto Loan Car Loan: Interest Rates will be decided by Credit Profile. Now, people who were happy to thrive on loans for buying the luxuries of life on loan will find that getting a Car Loan or Auto Loan has become more demanding and more difficult.

The reasons are many.
First, the interest rates has risen significantly. Though Car Loan Auto loan interest rate is comparitevely cheaper, beacuse the car itself is used as a collateral, but it is a luxury or accessory which depreciates in value as the time goes by. So, the high rates of interest have hit the car buyers on loan significantly.

Second, the credit profile or Credit Rating of an individual will be deciding the interest rates which you need to pay. That again is subjective and depends on the loan offering organization.

Third, there is a requirement for margin money -this is the margin money which needs to be brought in upfront. The bad news is that major loan offering players like the Private sector banks have quietly hiked the margin requirement by as much as 10 percentage in the past few weeks.

What this means, say if you want to buy a mid-size luxury car which may cost somewhere like 500,000. So apart from the loans, you are required to put in some money upfront from your side. Some weeks back, it used to be only 5% and now it has gone up to 15% or 20% by some banks. It means that if for a 500,000 Rs. car, initially you were required to pay only 25,000 as margin money from your side and rest through the loan. But now you will be required to pay 75000 or even 100,000 as margin money, so your loan amount available to you will be less.

Why is this happening
Well, banks are running for cover due to the global economic turmoil. They are running short of cash. The interest rates have increased so banks need to keep a lot more money as reserve with the central banks of the respective country. Hence, there is a problem of liquidity in the market and therefore not much money is available. So the banks are expecting the loan borrowers to shell out more money from their side and take loans of smaller amounts. However, these loans are offered at high interest rates.

TOI had an article in last few days, where it mentioned that "for a car buyer is that he should shell out 60,000 upfront for a compact car as against 20,000 earlier and increases correspondingly for bigger cars. Till recently, car financiers used to finance upto 100% of on road price of car.
"This is not all. In most cases, car financiers have brought in tighter disbursal norms, making a purchase a Herculean task. I know of a case in Coimbatore, where a buyer was asked to show property in his name to avail of a loan for a small car. And more so, after all paper work, the lender disbursed only 85% of the car value," sources said. A section of market feels that rising interest rates actually don’t hurt sales that much. A 50 basis points or half per cent increase on a one lakh rupee car loan for a tenure of three years would translate into a monthly of a mere Rs 36, they say.