Interest subvention in car loans

The finance minister, in his Budget speech announced that the existing scheme of interest subvention of 1% on housing loans will be extended to loans up to Rs 15 lakh. Earlier, the subvention was offered to housing loans worth Rs 10 lakh. This is subject to the overall condition that the price of the house is Rs 25 lakh as against the earlier limit of Rs 20 lakh.

Subvention is not a new concept or practice in the Indian banking sector. It is a financial incentive offered by one party to give a boost to the overall business. This benefit is usually passed on to the customer who is able to source a loan at a rate lower than the market rate. In retail loans, subventions are very common in the car loan segment.

Banks quote only rack rates. But the actual interest could be much lower, depending upon subventions and other dealer discounts. Typically, the bank specifies the rack rate on which it will propose to lend. The car dealer has the option of ploughing back his commission , thereby reducing the interest burden for the customer. The decision of the extent of commission to be ploughed back rests with the dealer. Hence, the extent of subvention is not standardised . Manufacturers also provide subventions, from time to time, to ensure stock liquidation , and these may also be passed on to the customer, to reduce his effective interest burden. The problem here is that auto loans always work on subventions, which vary from dealer to dealer. So it becomes difficult for a borrower to scout for the cheapest rate in this scenario.

Subventions vary from one car model to another and one dealer to another. Ideally, a borrower should fix the car model, know the price and fix the loan amount. Once a borrower knows the exact loan amount, he should approach the dealers who also act as DSAs for auto loans. Any customer should ask only for cash discount . If a borrower is paying Rs 1 lakh as the down payment for a Rs 5 lakh car loan, s/he should ask for a cash discount on that Rs 1 lakh. Then, s/he should compare the discount to offer by various lenders to identify the best deal.