Recently, we published an article on how gold loan financing NBFCs checking the purity of the gold they pledge. In continuation of the same theme, today, we will try to explain how vehicle financing NBFCs conduct their valuation process for the vehicles they finance.
In India, vehicle financing NBFCs are operating in two segments, which are:
- New vehicle financing;
- Used vehicle financing.
In case of new vehicles, the price of the vehicle is set by the original equipment manufacturers (OEM) like Mahindra, Maruti Suzuki etc.
How Does it Work?
The concept of vehicle financing is simple.
The financier provides loans on the basis of these prices of the vehicle to the borrowers. Appraisal in this case is based largely on the profile of the borrower. Basis this evaluation, the NBFC will decide the ‘loan to value ratio (LTV)’.
LTV is basically the skin in the game of borrowers. For example, if the LTV is 80%, then 20% of it is the borrower’s money
that he/ she has brought in to purchase a vehicle.
However, in case of used vehicle financing, the evaluation of the health of the vehicle is also equally important apart from the evaluation on borrower’s repayment capability.
Why Is Vehicle Valuation Important?
Correct valuation of vehicles is important to determine the LTV being offered to the customer and helps the NBFC to avoid losses.
For valuation, an NBFC will employ experienced branch employees who are skilled in evaluating the vehicle, as well as the borrower.
For a second opinion, NBFCs also hires external valuation agencies which are expert in the determining the value of the used vehicles.
These agencies based on parameters like Age of the vehicle, kilometres driven, Manufacturer of the vehicle, number of previous owners, physical condition etc arrive at the value of the vehicle.
Below is a sample valuation report for our reader’s understanding:
The NBFC, on the basis of the valuation report and their own assessment determines the value and provides finance. NBFCs have their own policies on the maximum age of vehicle, the maximum LTV, etc. And based on these parameters, they charge the interest rate for borrowers.
It is also worth noting that the loan tenor given is normally much lower than the residual life of the vehicles being financed – this ensures that loan is amortising at a rate that is faster than the depreciation of the underlying vehicle.