FINANCE
	BANKING

Buying an auto a part at a time

The development of bank loans to buy cars has led to a series of direct relationships between agents and banks. Although the bank retains the right to accept or refuse loan requests, the application process is often done through the agency itself. This 'one-stop-shop' of putting both car and finance facility benefits dealers, who can say to customers "we can not only supply you with a car but also seek out the money to pay for it," and buyers, who do not have to call at separate places for car and money. Different criteria are used to finance the purchase of new and used cars. The down payment percentages and the interest rates for new cars are lower. Sometimes the deposits on a new car are only half that required for a used car, even though the drop in value on an auto is largest in the first year of its life.

The maximum loan banks grant for a new car is usually $75,000 - or around 85 percent of the purchase price. The actual maximum and percentage of down payment varies from bank to bank. In the used car market, the highest loan given is around $70,000 and the down payments range from 20 percent to 50 percent depending on the age of the car. Incentives to buy new cars also extend to have longer repayment periods - typically five to six years for a new car, and four years for a used one. The interest rates on used cars are one or two percent higher than those on new vehicles.

Costs of Paying back loans

Interest Application or file fees Fiscal stamps Insurance cover Mortgage fees

Interest

The rates quoted for car loans are always flat - calculated on the whole loan for the whole period - and fixed - the same rate for the whole repayment period. The low numbers quoted do not represent the effective interest rate - or Annual Percentage Rate (APR). On a new car loan of $20,000 carrying a flat interest rate of 6.5 percent with a four-year repayment period, the APR is 11.83 percent. For used car loans the difference is even more pronounced. A loan over three years at a flat rate of 8.5 percent carries an APR of 15.34 percent.

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Application or file fees

Almost all banks that offer car loans require application - or file - fees varying between $25 and $150. These are usually paid at the beginning of the loan process, although a few banks calculate it inside the interest rate.

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Fiscal stamps

Where repayment is made by monthly notes, each note carries stamps to the value of 0.15 percent (a $500 monthly repayment requires stamp fees of $0.75 or its LL equivalent per note). Sometimes a single note is made out for the whole amount of the repayments. Either way the fiscal stamps cost remains the same. If the banks fix a schedule for payments to be made to them directly, no fiscal stamp fees are required. Notes are used because, for the bank, these are a tradable commodity, i.e. they can effectively 'sell' the loan to someone else.

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Insurance cover

On new cars, all banks require the borrower to have total loss insurance. This saves banks from persuading borrowers to continue payments on a car that may no longer exist after a serious road accident. Paying for insurance cover varies from one car loan scheme to another. Some banks, especially those with affiliated insurance companies, offer the option of incorporating the cost into the monthly installments, thus saving the borrower from paying what may be a sizeable premium at the beginning of the loan. Others insist that a year's premium is paid in advance and that proof of subsequent renewals is produced. The cost of all-risks insurance is based on a percentage of the car's value and, although the value of a car falls as it gets older, the percentage on which the premium is based tends to rise. Many banks offering car loans require the borrower to take out life and permanent total disability cover for the whole of the loan amount covering the repayment period. Some banks cover the life insurance fees themselves. Otherwise borrowers either pay for the policy inside the monthly installments or on an annual basis.

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Mortgage fees

Registration of a mortgage on the car is required when taking out a loan. This eases the bank's ability to repossess the vehicle in case of default. The value of the mortgage registration covers 100 percent of the loan, and the client is responsible for the registration fees, in most cases outside the payment schedule. The mortgage costs 0.65 percent of the loan amount, in addition to the related fiscal stamps fees which cost an additional 0.15 percent. Registration costs for a $20,000 car loan come to $160. After all the repayments have been made there is a further small charge to secure the release of the car from the mortgage.

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Not paying on time...
or repaying loans early

Penalties

Banks adopt one of two methods of fixing the level of late-payment penalties. Some impose a fixed amount varying from $5 to $10, while others charge a percentage per month - between one and three - of the installment. In cases of early repayment, none of the banks gives up any of the interest originally due if only "a few" notes are paid off early. What number constitutes a "few" is a matter of negotiation. Where the whole outstanding balance is paid off early, it is common for banks to reduce by two percent the rate of interest that would have been due to them had the loan run its full course. However, a few banks are prepared to forego all outstanding interest in case of early repayment of the whole loan amount.

 

What do I need to apply?

Documents

A copy of ID, a detailed statement of salary, including type of work, net salary, and a declaration of all current obligations such as rent, mortgage payments, other loans, or alimony. Salary and job details must be confirmed by the employer on company stationary. Most banks offering car loans do not require domiciliation of salary and less than half seek a personal guarantor. Even those that require a guarantor generally restrict it to cases where an applicant's salary level is borderline given the size of the loan.