HDFC Bank’s Mega Car Loan Mela offers innovative EMI options, which one should you choose?

The bank offers up to 100 per cent on-road funding for select models of cars. The borrower can get a loan up to Rs 10 crore on a wide range of cars and multi-utility vehicles and repayment tenure is from 12 months to 84 months (7 years).

HDFC Bank is offering new car loans up to 7-year tenure from an 8.85 per cent interest rate onwards that varies with the borrowers’ credit profile and repayment history.

The key additional features for the customers on the car loan are zero foreclosure charges, eligibility for a top-up loan after nine months, and insurance benefits including total protection against permanent total disability, accidental death and accidental hospitalisation.

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Step-up EMI

In the step-up EMI scheme, the EMI increases with time, unlike the standard EMI scheme where it remains constant through the tenure of the loan. For instance, the customer may choose to increase the EMI by 11 percent every year through the tenure.

Abhinav Kaul, Vice President-Strategic Partnerships, BankBazaar, says, “The step-up option could be a good bet as it lets you start your EMIs with small amounts and then go up over the next one or two years, as your financial stability improves.” However, you may end up taking a higher EMI commitment based on future incomes, which may be uncertain due to job losses in the start-ups and information technology (IT) sector in the last few months.

According to Rachit Chawla, Founder and CEO of lending and investment advisory platform Finway, “You may also land into a bad credit score in case of failure in repayment in this scheme.”

Balloon repayment

In the balloon repayment scheme, a certain percentage of the loan can be repaid as EMI (calculated based on eligibility) while the balance can be paid at the end of the loan tenure. So unlike the step-up repayment scheme where the EMI gradually increases, a customer can pay an equal EMI for a certain chosen amount and the balance as a bulk amount in the last instalment.

For instance, a five-year car loan will involve the customer paying 14 per cent lower amounts than regular EMIs for 59 months; the last instalment will be approximately 25 per cent as a bullet repayment at the end of the tenure (refer to graphic). This scheme is suitable for borrowers who want to keep their monthly expenses low and are certain of their ability to repay the last instalment.

Gaurav Gupta, Co-founder and CEO of MoneyWide, a lending platform and RBI-licensed NBFC, says, “The caveat in balloon repayment scheme is that these loans turn out to be costlier as you keep paying interest on a significant loan amount outstanding till the end of the tenure.”

Kaul says, “Compared to the regular car loan scheme, the step-up and balloon repayment plans are more expensive.”

It’s important to note. The balloon repayment scheme is risky because cars are depreciating assets and they lose value over time. So by the end of the loan tenure, the customer is left with a car that’s worth significantly less than what was paid for it and has to pay off most of what was borrowed at the end of the tenure.

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Moneycontrol’s take

Millennial borrowers keen on buying a car using the step-up or balloon repayment schemes need to evaluate their loan eligibility and expected future income, as well as understand the terms and conditions of the loan scheme thoroughly and compare them with the standard car loan scheme before taking a decision.

If you take a car loan with step-up or balloon repayment options through a car loan mela then it’s recommended as your income increases, make part payments towards the car loan and bring down your long-term interest costs.

A car loan with a regular payout option is a suitable option as the interest payable is lower compared to other repayment options (explained in the graphic).