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Old 10th July 2013, 08:12   #1
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Default Buy car using cash OR Take car loan & prepay home loan?

Hi

I dont know how silly this query sounds like, but this is in my mind right now.

I got a home loan with 13-14 lakhs principle left. Housing loan interest is close to 11% floating.

Now i plan to take a car but i have an option to either take 3-4 lakhs of car loan or stretch and buy without any loans.

From the looks of it, House loan means more cumulative interest due to the long tenure. But i also get tax benefit on the interest component(1.5 L translates to only 1L after 30% tax benefit.)

So my confusion is, should I go for car loan of 4 lakhs and pre-pay 4 lakhs to my home loan ? or keep the housing loan as it is and buy the car using cash ?
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Old 10th July 2013, 08:28   #2
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Default re: Buy car using cash OR Take car loan & prepay home loan?

Car loan earns you no tax benefits.
Home loan does.

Your home loan is at such a low level that 4L pre-payment will be likely to impact tax calculations (esp if shared between you/your wife).

I say don't touch the HL - save up, buy with cash. (i would not advise increasing either loans unless its for an investment. A car is a depreciating asset unless you're in a hurry.
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Old 10th July 2013, 08:52   #3
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Smile re: Buy car using cash OR Take car loan & prepay home loan?

+1 to Phamilyman.

Your net interest rate for your home loan will be less than 11% after the standard 1.5L deduction. Whereas your Car loan will have a higher interest rate and will not get any deduction unless you have opted for the car lease scheme from your company where it mught be advantageous.

Also prepaying homeloan in any case will not reduce your monthly EMI outgo, will reduce the tenure only. However if you are being offered a car loan at a substantial reduced interest rate (like the one being offered by Maruti Suzuki) then it make a point, provided the extra cash which you have if deposited in any other investment (like FD, Debt fund, Bond etc) would earn an higher interest than your car loan. Hope this is not confusing.

Suggestion: Weigh the pros and cons before any decision.
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Old 10th July 2013, 09:11   #4
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Default re: Buy car using cash OR Take car loan & prepay home loan?

Keep the home loan as is, outstanding at this point may not be substantial enough to get benefits of reduced interest outflow (the home loan interest calculation is such that almost all of the interest over the tenure is paid off in the first 5 years!).
The cash you have - use it partly for down payment (and rest can be car loan). Remaining cash I suggest you keep it in an FD so that you will earn interest on it (you may have to pay tax on the interest earned. There are also tax saving 5 year FD's, please check). This way, for the car loan you will effectively only pay the differential between interest earned on FD and interest on car loan.
EDIT-Do consider car lease as well, in that case all your cash can go to FD

Last edited by NPV : 10th July 2013 at 09:14.
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Old 10th July 2013, 09:40   #5
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Default re: Buy car using cash OR Take car loan & prepay home loan?

This post of mine may help you take a call on the tenure reduction when part paying a homeloan.

https://www.team-bhp.com/forum/shift...ml#post3070272

I am in the second year of my home loan.
As far as I am concerned if the large chunk of my payments are for interest i.e the first couple of years, partpayment is where I would use my money.

My home loan interest rate and the rate offered for a new car is almost the same. Around 10.5%.

However some cars are available at substantially reduced interest rates.
Like the Tata Manza at 3.99% for 3 years with a max cap of 7 lakhs.
Another example is the VW Vento and Polo that have a very attractive offer.

Last edited by bblost : 10th July 2013 at 09:44.
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Old 10th July 2013, 09:55   #6
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Default re: Buy car using cash OR Take car loan & prepay home loan?

Thanks guys,

This is just a thought. I have already crossed the halfway mark for my homeloan and i already done part prepayments to bring down and maintain the interest at just 1.5L per year now. Any more pre-payment and my interest rate might come down below 1.5L.

So looks like i do not have much advantage taking a fresh loan right now. Only advantage is that by doing a pre-payment, i can wipe off few years from my home loan EMI.

Which translates to 2-3 lakhs as compared to say 1 lakh interest paid over 4 years on a car loan. I may be missing some catch here.

Quote:
Originally Posted by NPV View Post
EDIT-Do consider car lease as well, in that case all your cash can go to FD
Unfortunately, my company does not have any such schemes and for car lease to work, i need to make a jump and ensure that the next company has some attractive lease scheme.
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Old 10th July 2013, 10:12   #7
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Default re: Buy car using cash OR Take car loan & prepay home loan?

Raj in your specific case DO NOT CLOSE YOUR HOME LOAN.

If you buy another home on loan then you qualify for a full tax waiver on its interest.
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Old 10th July 2013, 19:03   #8
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Default re: Buy car using cash OR Take car loan & prepay home loan?

If you part-pay your home loan principal, will it help reducing the EMI? Most banks refuse to reduce the EMI amount for principal reductions.

If yes, then it is useful as you can claim tax savings for part-prinicipal repaid and EMI reduction in housing loan can be diverted to car-loan. The rate of interest for the two loans needs to be considered for making a decision.
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Old 10th July 2013, 21:41   #9
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Originally Posted by rajshenoy View Post
Thanks guys,

This is just a thought. I have already crossed the halfway mark for my homeloan and i already done part prepayments to bring down and maintain the interest at just 1.5L per year now. Any more pre-payment and my interest rate might come down below 1.5L.

So looks like i do not have much advantage taking a fresh loan right now. Only advantage is that by doing a pre-payment, i can wipe off few years from my home loan EMI.

Which translates to 2-3 lakhs as compared to say 1 lakh interest paid over 4 years on a car loan. I may be missing some catch here.

Unfortunately, my company does not have any such schemes and for car lease to work, i need to make a jump and ensure that the next company has some attractive lease scheme.
Raj, there is a time tested simple thumb rule for loan prioritisation.

Always close unsecured loans first and foremost - personal loans, credit cards, etc.. In fact it is best never to have these if possible.

Next in line are depreciating asset loans - auto, appliances, mobile phones, etc.

The last loan one should close is the appreciating asset loan - property loans usually fall under this criteria. In addition one also gets a tax break for the first home so all the better.

In your specific case, do not repay the house loan and stretch as much as you can to buy the car cash down. Most prudent option. Other than interest rates, there are a lot of hidden costs one ends up incurring - processing fees, documentation, RTO fees, etc when managing a new loan.

Taking a loan and Making an FD is not an option. It is tax and interest inefficient.


Lastly, there are lucrative 3.99% or similar car financing deals that manufacturers put out from time to time. My experience has been that these are almost always on ex showroom prices or with minimal discounts. If one goes to the dealer with cash in hand, one can negotiate a level of discount that will never be possible on a reduced interest offer
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Old 11th July 2013, 00:53   #10
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Default Re: Buy car using cash OR Take car loan & prepay home loan?

In a recessionary market, put cash into MF or stocks that you understand really well with a 1-2 yr horizon, buy car on loan, and keep home loan running. Or buy car with cash + loan of balance value, and keep home loan going.

In a bullish market, surely buy car with cash + loan of balance value, and keep home loan running to avail tax benefit.

Quote:
Originally Posted by ghodlur View Post
Also prepaying homeloan in any case will not reduce your monthly EMI outgo, will reduce the tenure only.
No, its actually your choice. When you prepay, you can choose between reducing tenure or reducing EMI. For sure, former is beneficial but choice is yours.
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Old 11th July 2013, 08:01   #11
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Default Re: Buy car using cash OR Take car loan & prepay home loan?

Rule no 1 of financial planning: Never fulfill long term needs with short term fund sources.

Home is a longer term need prepaying home loan and taking a loan for car is effectively finding long term need with shorter costlier finance.

Buy car with cash keeping aside your emergency funds and take minimal or no car loan.
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Old 2nd August 2013, 17:17   #12
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Default Re: Buy car using cash OR Take car loan & prepay home loan?

As mentioned by the others, the car loan is a strict no no. For me its a simple logic....

Car Loan: Loan on a depreciating asset = waste of money

Home loan: Appreciating asset, I consider the EMIs as a sort of saving for the future where the price appreciation of the property more than off-sets the money that you end up paying for the loan.

This logic probably does not have solid fundamentals but in the end, you do end up making more money than what you pay for on a home loan.
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Old 2nd August 2013, 17:22   #13
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Default Re: Buy car using cash OR Take car loan & prepay home loan?

How about this? Pre-pay the car loan somewhat. And with the cash in hand get yourself a nice used car. No second loan. No interest. No EMI. Life's good.
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Old 2nd August 2013, 18:16   #14
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Quote:
Originally Posted by rajshenoy View Post
Hi

I dont know how silly this query sounds like, but this is in my mind right now.

I got a home loan with 13-14 lakhs principle left. Housing loan interest is close to 11% floating.

Now i plan to take a car but i have an option to either take 3-4 lakhs of car loan or stretch and buy without any loans.

From the looks of it, House loan means more cumulative interest due to the long tenure. But i also get tax benefit on the interest component(1.5 L translates to only 1L after 30% tax benefit.)

So my confusion is, should I go for car loan of 4 lakhs and pre-pay 4 lakhs to my home loan ? or keep the housing loan as it is and buy the car using cash ?
Go for a car loan of 4 lacs.

The bank has already charged u all their interest in the first half of the tenure. And during the second half your payback tenure, you're mostly paying back the principle only. Plus u get a tax deduction of 1.5 lacs (I think this has gone up now to 2L). This limit is bound to increase next budget as elections are coming up.

Don't pay cash for your car - if you are a self employed person or have any firm in the family, the interest paid on the car loan is tax deductible under the firm's expenses (provided the car is in the firm's name).

It's a personal opinion but I always believe that there's nothing stronger than cash in hand. It can be used for emergency situations/unforeseen financial difficulties.

If u take a loan on ur car, for some reason are unable to pay an installment or 2, the bank will simply put a penalty. The worst case scenario is they take your car back. But all your assets are untouched.

God forbid if you have an emergency tomorrow, you don't wanna sit n wonder why u gave all your cash to the car dealership.
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