This is the rate of interest at which the financier is willing to do business. For example, a financier may be willing to provide car loans at a base rate of 10.5% to 11% per year. This rate is generally fixed and cannot be negotiated. Most financiers operate at similar base rates. However, financiers generally provide "interest rate breaks" to the extent of 0.5% to 1% per year for customers who have an existing relationship with them, a credit card issued by them or an income level that is higher than their eligibility requirement. Contrary to popular belief, reduction of a customer's car loan interest rate is achieved as a result of financial contributions provided by other players such as the manufacturers, dealers or sales agents, and not the financier except for the "interest rate breaks".
Car manufacturers' subvention
Car manufacturers give a financial incentive to a select few car finance firms to push sales of their cars. This makes some of the larger car financiers more competitive than the smaller players who are not eligible to receive manufacturers' subvention. For example, a financier may receive Rs.6000 from Maruti Udyog for every Esteem car loan booked by him. Generally, the financier will build this incentive amount received from the manufacturer into the pricing of the car loan.
Different dealers hold different levels of stock. A dealer holding higher stocks may be willing to part with a higher discount. Dealers also receive incentives for target achievements from the manufacturers in addition to the mark-up that they have on the sale price of the car. A dealer who is likely to receive a substantial incentive by selling a certain volume of cars in a given month may be willing to part with a much higher level of discount than another dealer who is unlikely to receive any incentive. Generally, the car financier will, as a next step, build the dealer discount into the pricing of the car loan.
Agents market the financier's loan schemes to you and complete all the paperwork on behalf of the financier. It is the agent who negotiates the discounts provided by the car dealers. The amount of discount that the agent is able to negotiate from the dealer depends upon how many cars are sold from the dealership by the agent and the relative importance of the given agent's business to the dealership. The agent also receives a commission from the financier for bringing him his car finance customers. This commission is of two types. The first is a standard commission given to the agent by the financier on the loan amount disbursed to you. This could be around 3% of the loan amount disbursed. The second is a target-achievement incentive. Most agents give away the standard commission so that their rates can be cheaper than those of their competitors'. This is called the agent's re-subvention i.e. the agent giving back his standard commission to the financier in order to further reduce the borrowing rate for you.
From the above you would observe that you may get your loan at 9.5% per year even though the car finance firm has priced the loan at 11% per year. The difference between your borrowing rate and the financier's base rate is the benefit to you, the customer, created as a result of the car manufacturers' subventions, dealers' discounts and agent re-subventions.