In response to the pandemic, those returning to work prefer to use their own cars instead of public transport or application-based taxis, said Aditya Mishra, founder and CEO of Switchme.in, a platform that helps borrowers transfer their loans to other financial institutions.

To gain a foothold in this market, Maruti Suzuki India Ltd, the country’s largest car manufacturer, signed a partnership agreement with HDFC Bank Ltd to offer flexible EMI opportunities to new car buyers.

Flexible loan repayment structures can work for those who have suffered wage cuts and expect their wages to be restored after normalisation and full release. Once their salary is restored, they can pay the usual VRU.

Options

The Bank offers three repayment options to borrowers who may be faced with a lack of liquidity.

Of the three programmes, two focus on the lowest levels of BMI in the first months. The first scheme combines a instalment payment with a one-off payment, with the first phase of the AVR being lower and taking place at a later stage of the term of office. Under the HDFC banking program, the initial HDI is only ₹1,111 to ₹1 lakh with a payback period of 84 months.

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Graphs : Parace January/piece

The second option allows borrowers to pay lower EMIs for the first six months (for employees) or three months (for self-employed). In this case, the EMI will resume its work at ₹899. The third is a flexible EMI programme whereby the borrower can opt for lower EMIs for three months a year during the term of the loan.

These structures also improve borrower acceptance as the original EMI is lower, making it possible to decide on the amount of a loan.

HIGHER PAYMENT

Flexible loan repayment structures are costly. They’re like a moratorium a borrower uses to get a loan. If no payment or a lower payment is made within a few months, the interest shall be added to the capital and the interest shall be compounded. This increases the total amount of deductions, said PersonalFinancePlan founder Dipesh Raghau, an investment advisor registered at Sebi.

In the step-by-step credit option offered by several banks, the EMI is lower than part of the original maturity of the loan and then increases. Lenders tend to focus these loans on young professionals based on their future earning capacity, which also allows them to take out a loan for a larger amount. Suppose the borrower takes up the loan on ₹7 lakh and pays the EMI ₹8 000 for the first three years and ₹14 603 for the next four years. Here the borrower ultimately pays ₹42 920 extra interest on the total amount of the deductions compared to the normal EMI (see graph).

In accordance with the balloon structure of the loan repayment, the borrower first pays smaller EMI amounts and makes a large lump sum payment at the end of the repayment period. This is a form of repayment where the interest outflow is much higher than with other repayment structures. The balloon works for those who receive bonuses every year and can make a large payment in one go, says Gaurav Gupta, CEO of MyLoanCare, an online credit marketplace.

For borrowers it can be difficult to analyze the combination of the step and the ball. This also leads to a higher yield later on.

What should you do?

Each service has its own costs. If the pandemic does not affect your cash flow, it is best to follow the regular repayment method.

Flexible structures can only work for you if you are certain that your income will be restored in the coming months. However, there have been redundancies and there is considerable uncertainty about the impact of the blockade on business and the economy. In case of uncertainty, borrowers should avoid new obligations, Mr Ragav said.

The low three-month EMI values work for people with higher values in certain months, such as March and April, when people invest in taxation and pay tuition fees, Gupta said.

If you think this is good for you, don’t forget to apply for a credit plan and check that your cash flow meets your needs. Also organize a discount for the car and see if it suits you.

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