Though the Finance Minister's Vote on Account statement was a non-event for most observers, it cheered the aspirations of car buyers. The Finance Minister announced reduction in excise duty. Carmakers happily passed on resultant benefits to customers by reducing prices. This looks alluring given the availability of cheaper vehicle loans from various banks at present. However, one should be careful of multiple factors before making the most of this development. Here are a few factors you should consider before making up your mind of buying a new car:
Do you need one?
Age-old wisdom asks us to distinguish between needs and demands. Needs are paucity of things, which are necessary and basic, while demands can be artificial and can be created in a sophisticated way. Sometimes it is the peer pressure that creates the demand for a car in our mind. Do not decide to upgrade just because your neighbour bought one or do not consider buying your first sports utility vehicle because your office colleague bought one hatchback. Also do not start visiting auto showroom just because there is a cut in prices. According to news reports, the price reduction in absolute terms is in the range of Rs 11,000 to Rs 51,000 depending upon the models and the manufacturer of the car. It cannot be called some windfall gain for the car buyers, or some bonanza as some auto sales persons made it out to be. Do go for one if you are of the opinion that it will add value to you.
Use car loans wisely
Car loans definitely are a good option due to attractiveness of interest rates. But avoid using leverage to buy something that you would not have bought otherwise. For example, if you are considering a purchase of a hatchback, stick to it. Just because the prices have fallen and there is an auto loan available, don't jump to buy a fully-loaded sports utility vehicle. Reasons are simple. It requires high down payment in absolute terms. Also the amount of Equated Monthly Installment (EMI) is high given the high price tag. This can be cumbersome when it comes to repayment. High amount of EMI can stretch your finances also. If you cannot service your car loan on time, it can impact your credit score, popularly known as CIBIL score. A low credit score can practically shut your doors to many opportunities because you become ineligible for loans, say a home loan.
Make the down payment from your own money. Do not rely on personal loans or credit cards to make the down payment. It not only burdens your finances but also increases the chances of you landing into debt trap if you cannot service such obligations. Also it impacts your credit utilization ratio, which further brings down your CIBIL score.
The right credit cards
Though credit cards are double-edged weapons, right choice of credit cards can save you money. If you are a first time buyer of a car, do apply for a credit card that is either co-branded with an oil marketing company or offers cash back. A co-branded credit card helps you save on the surcharge, around 2.5% that one has to pay while purchasing fuel using credit cards. A cash back credit card typically accounts for surcharge, but offers up to 5% of the billed amount as cash back, effectively offering a discount on fuel rack rate. But do read the fine print. Co-branded cards are surcharge free when used only with the partners and cashback too comes with certain conditions. For example, a cashback card may limit monthly cashback to the extent of Rs 200 and may offer cashback on transactions of Rs 1,000 or more.
These are the few pointers you should keep in mind before availing of benefits of discounts on cars offered by carmakers. Be it buying a car or a house or a paying a telephone bill, it is about how judiciously you use your credit. So, maintain your credit profile, improve your credit score, and enjoy the long drive in your own car.
(Contributed by Rajiv Raj, director and co-founder at Creditvidya.com)
