Loan Schemes

There are four standard car loan versions.

• Margin Money Schemes
• Security Deposit Schemes
• Advance EMI Schemes
• Processing Fees

Margin money schemes

This is the most straightforward scheme of them all. For instance, if a car costs Rs. 1 lakh, a typical scheme would require you to pay at least 10% up front, and you would get a loan of Rs. 90,000. The Loan to Value (LTV) ratio is 90% in this case. The interest rate quoted will be on this Rs. 90,000. Thus if the rate quoted is 16% for 12 instalments, the EMI would be Rs. 8,166. The interest rate is charged on a monthly basis.

Security Deposit Schemes

This is a variation of the Margin Money Scheme. In this, the company claims to give a loan of 100%, but asks for, say, 10% of the amount in advance, which it will return at the end of the loan period.
In effect, you are still getting a loan of 90%. But the reason that you are being "shown" a lower rate is that the designer is making interest on your deposit for the period of the loan, when your money is lying with him. He uses that money to offset the amount that he is charging less from you.
Some security deposit schemes offer interest on the deposit that you pay. As long as this rate is lower than the rate that you are paying in a normal margin money scheme, the designer can reduce the price of the loan. Suppose you had to put in a deposit of Rs. 10,000 in the above case, on which 14% is being offered. The scheme lets you borrow Rs. 1 lakh, instead of only Rs. 90,000. In effect, he is borrowing the additional Rs. 10,000 from you at 14%, and is lending you that same money at 16%. So he's making extra money, which he can afford to use to reduce the 16%. Thus, he is using your own money to give you a lower rate.

Hire Purchase || Advance EMI Schemes