Buying a new car? Be careful about hidden costs

In an interview to CNBC-TV18, Harshvardhan Roongta, Roongta Securities discussed about hidden costs which are levied while buying a new car and how one can keep a note of it.

Also Read: Does it make sense to buy diesel car to save on fuel cost?

Below is the verbatim transcript of Roongta's interview with CNBC-TV18.

Q: It is raining discounts on purchase of new cars these days because of the huge slump that we have seen in the car sales and complete apathy in terms of demands. Tell us about what hidden costs are that one should be careful about while buying a car from a dealer?

A: Absolutely. An excitement to own a new car is so much that generally people tend to neglect all the hidden costs that come along with it. Now if a person wants to get into the details of the cost that he is paying, very comfortably he would be able to save about 2-3 percent of what is actually the cost that he pays for that car.

Let me give a couple of important points wherein a buyer needs to be careful about: (1) the equated monthly installments (EMI) scheme; most of the cars today are sold on finance schemes. If a buyer takes a loan suppose on July 1, the first monthly installment is technically payable on August 1. There is a very strange word called an 'advance EMI', which is used by finance executives. Let me explain the impact of 'advance EMI' when compared to loans.

The bank 'A' charges an interest of 11.3 percent for a 60 month loan and the EMI on Rs 730,000 loan works out to be about Rs 15,984. Bank 'B' wants to make it competitive so it will charge 11 percent and the EMI will be Rs 15,872. So, it looks good. It looks that EMI that the buyer is being charged by bank is lesser for the same tenure and the interest rate is 11 percent. But at the time of documentation the second bank, the bank 'B' insists to give one advance EMI, which means at the time of giving the loan even before disbursement of the loan they will take one EMI in advance. This one single change in the mode of collecting EMI effectively changes the interest rate, not at 11 percent but now will be at 12 percent. This is one of the financial gimmicks wherein the buyers are completely deceived into deciding because the absolute amount of EMI is just not the parameters on which one decides which bank is offering at a cheaper rate.

(2) One needs to be careful about registration and the service charges. Besides the ex-showroom price, one need to get car registered. The dealer, the amount that they collect under the registration and service charges, is way above the tax that is required to be paid to the Regional Transport Office (RTO). The difference they argue is the service charges.

If one is buying a particular car and he goes negotiating with different dealers of the same car, he will find all dealers levy the same registration and service charge. They have formed a cartel wherein they give the same figure to all the buyers. So, it looks as if it is a standardised charge. However, the registration charge, the tax that I am talking about is actually different; it is much lesser that what is been collected. So, the difference is towards agent fees, they claim to be giving to RTO agents as their fees.

There are some other miscellaneous expenses but if one notice the tax that has to be paid, can be calculated by the buyer himself, for example a petrol car up to Rs 10 lakh, if it has to be registered in Maharashtra, the tax is 9 percent and if it is going to be registered in Mumbai then the buyer will have to pay other taxes and the cost will be higher. The buyer can calculate this cost and question the dealer for the difference that he is collecting towards services charges. More often or not the buyer will get vague answer; the buyer will not get an exact calculation as to why the difference has been charged. Therefore, if the buyer negotiates hard in these times then there is likely that the dealer will wave off those charges or reduce those charges.

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(3) Another important thing is insurance. There is a kind of an obsession these dealers have when bundling and forcing the buyer to buy insurance along with the car. The dealer will say that he will sell the auto insurance and motor insurance also; in fact it will be surprised to know there have been two instances wherein I have been personally refused to be sold a car completely because I insisted that I will get insurance on my own. So, I begin to think that why would a dealer be more insisted on selling insurance than the car. So, are they insurance dealers or are they car dealers.

Nevertheless, the idea is if the buyer goes negotiating outside, outside what has been packaged as a policy with the car dealer, there are chances that the buyer will get premium offer from different companies who are even much cheaper and there are different kind of policies available in the market with different add-on covers. So, whatever is the exact requirement, the buyer should be buying that. So, the buyer could go out getting quotations from different companies even for the new car and not rely on the dealer.

(4) The final charges are the depot charges. An ex-showroom price in my opinion and in simple layman word means the price all inclusively of all the cost to be given to the buyer outside the showroom of the dealer. Surprisingly there is again a cartel being formed wherein all dealers will charge a depot charge, which is over and above the ex-showroom price. It is like a biscuits available at MRP of Rs 20 but the buyer has to pay Rs 5 extra as warehousing charges because it has been stored somewhere and now the buyer has to pay separately. So, this concept is not understandable. If there is an ex-showroom, isn't it supposed to include everything up to the car being delivered ex-showroom, why cannot this depot charges be included in the MRP or ex-showroom price itself.

So, if the buyer negotiate hard and talk to the dealer, he will not have a clear explanation. I have tried to seek explanation on depot charges and I have not got any clear explanation as to what is this depot charge and why is it not a part of ex-showroom price.

Therefore, if the buyer is going to negotiate hard during these times then it is likely that the buyer will be given free accessories in lieu of these depot charges which have been levied. So, if a buyer does a bit of research on all the cost then he will comfortably save 2-3 percent on the total cost of the car.

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Caller Q: Please suggest the best option for investing in debt funds.

A: Considering the current situation where in we are seeing interest rates rising and lot of monetary restrictions being put by Reserve Bank of India (RBI), I see flattish returns from the debt funds over the next three months at least. Debt funds have started behaving like equity wherein the daily developments need to be tracked to decide the future course of action. So, with rising interest rates the benchmark 10 year yield has gone above 8 percent, risen by about 50 bps very recently. Therefore, it has impacted the debt funds negatively.

If you have a time horizon for less than one year it would be more prudent to stick to bank fixed deposit at this moment because there will be lot of volatility in the debt segment over the next quarter. If you can stay invested for more than one or two years then you may consider investing in debt funds. In case you wish to get in debt funds, SBI Dynamic Bond Fund would be a good fund to choose in such volatile situations because this fund gives the fund manager the liberty to modify the duration of the paper that he is holding. It will be much easier for you to manage and take the advantage of volatility in current situations. So, if it is less than one year, bank fixed deposits (FDs) and if more than one year then SBI Dynamic Bond Fund would be better.