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View Poll Results: My ideal car loan tenure is...
0 years. I buy my cars outright 64 16.58%
1 year 8 2.07%
2 years 13 3.37%
3 years 116 30.05%
4 years 28 7.25%
5 years 113 29.27%
6 years 0 0%
7 years 40 10.36%
8 years & over 4 1.04%
Voters: 386. You may not vote on this poll

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Old 29th June 2017, 20:32   #16
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Default re: Your preferred car loan duration

I have a tenure of 15 yrs. My mom works for a PSU bank and staff loans are dirt cheap in terms of interest (though there's a ceiling on the amount you can take). The catch is that the car has to be in my mom's name. And it has to be registered in my hometown since she has no address proof in the city where I live. But the EMI costs me next to nothing. It is less than 5k for an S Cross Zeta.
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Old 29th June 2017, 21:44   #17
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Default re: Your preferred car loan duration

Quote:
Originally Posted by dass View Post
Interest payable for 2 years on a 7 year loan is 121698.45 for a 6.5L loan at 10.40% interest rate. the same if paid over a total of 7 years is 267748.45, that's a total savings of 146050. why is this bad?
Exactly. Thank you for putting up an example scenario.

Now lets say you repaid the said loan after 2 years.

At the end of 2 years, the outstanding principal amount will be roughly 510,000 (+/- 5k). You get to use this amount for a total interest of 146,050 as you mentioned. But now consider making an FD of this 510,000 @ 7% for 5 years.
Using the simple interest calculation, you can earn an interest of 178,500 in 5 years @ just 7%. Compounding interest can take it even higher.

Get the vibe?
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Old 29th June 2017, 22:25   #18
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Default re: Your preferred car loan duration

While I am all for taking a car loan, I personally am very uncomfortable with running a car loan for a long duration. Prefer to close it inside 2 years at the max.

One reason why I prefer pre-owned cars even though I can potentially afford a new car of the same model via a higher loan/EMI. Apart from the fantastic value for money proposition, helps remove/minimize the need for a loan.

From a pure financial perspective, my logic probably does not make sense, this is more from a personal perceptive.
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Old 29th June 2017, 23:22   #19
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Default re: Your preferred car loan duration

I haven't bought a car personally, but have seen first hand my father buying cars.

First of all, if you are self employed and are constantly investing for future expansion, car loans make tremendous sense. The Rate of interest can be brought down to reasonable levels barely 2 percent above the FD rates at that time. Simple reason: You would most likely get a higher performance and future achievement by investing in your own business. That's the main reason we have used car loans.

2nd: Don't look at buying outrageously expensive cars, Eg: Refer to that thread" What %age of your income should your car cost?". The ideal would be under 20 percent but in any case, don't exceed 40-50 percent. At that point you can likely afford to put in a good percentage as a downpayment to get the interest down.

3rd: Even if you can buy the car outright, don't do it unless the amount is really miniscule as compared to your income. For one, its a temptation to just save the interest: You can spend it on your own business most likely. And also, it attracts unwanted attention from the IT department. You might be saving for that car for years, but when you finally decide to bite the bullet and co-incidentally also happen to make a foreign trip the same year, you will turn heads no matter how clean your work and intentions are.
Another advantage that we didn't even know about was the credit history that you build with the bank. Yes I know the Cibil score and everything. But even in other aspects of banking. We finished the Loan for our honda city a couple months before it was due and were rewarded with a free Visa Platinum credit card. No usage charges or annual fees and it is being renewed free of charge almost 10 years now. And it being the platinum card had a tonne of privileges from free Airport lounges to free movie tickets . Its not a big thing but something to note since my parents only had "regular" credit cards at that time

For the smaller cars(say less than 5 lacs) it is common to buy with cash outright since the advantages of saving that much may not be enough for a good part of population now(with the Rising incomes).

That said, if you are salaried, it seems that you would rather have to pay Tax on the whole EMI(including interest) so that is a big disadvantage and buying on Loans would prove more costly. If you are only going to be saving your money and taking care of it by FD's alone then yeah it makes most sense to buy it outright.
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Old 30th June 2017, 01:14   #20
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Default re: Your preferred car loan duration

Good gyan.
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Old 30th June 2017, 06:21   #21
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Default re: Your preferred car loan duration

Quote:
Originally Posted by GTO View Post
In the 80s, car loans were unheard of in India, with most people buying cars on cash.
Hi GTO, nice thread. I've posted for no. 1, 0 years. But I would like to add that my car purchases are using loan against FD. That gives me freedom of paying as per my convenience and there is no sword of EMIs dangling over me. Can you add that option also? And if you add that option, please un check my first choice.

Last edited by GTO : 30th June 2017 at 12:15. Reason: Removing image from quoted post
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Old 30th June 2017, 06:36   #22
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Default re: Your preferred car loan duration

Why not liquidate the FD and not take the loan? Save the money by eliminating the interest rate difference. How does it make sense to invest at 6-7% and borrow at 12-14 from the same place?
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Old 30th June 2017, 10:32   #23
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Default re: Your preferred car loan duration

I prefer 7 years as well. I have the option with Axis Bank to make part prepayments without a charge as well as nil foreclosure charges. This gives me an option to make bulk payments when the yearly bonus comes in and bring down my tenure. In the mean time I can pay lower EMIs with an interest rate of 9.1%.

Initially I was thinking of taking a lease since I had very good experience taking one, (Thank god I did not because GST would have ripped me), however the lease option in my current organization is for 3 years max which would have made me settle for a smaller car, else the monthly rental would have been INR 40k + which would have been very difficult to pay. Here I am paying 16k a month and much more manageable.

Last edited by Altocumulus : 30th June 2017 at 10:41.
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Old 30th June 2017, 10:40   #24
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Default re: Your preferred car loan duration

So far my 3 car purchases have been without loans, but all have been small cars.
My next buy, likely another super small AT, will also be outright buy.
It is very likely that if I buy a bigger/expensive car, it will be via a loan.

Certainly believe that if one cannot buy a car outright, then its beyond ones means (aukaad). Now after passing this test whether one takes a loan or not really is a decision of what is the opportunity cost of investing elsewhere.

cheers
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Old 30th June 2017, 10:47   #25
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Default re: Your preferred car loan duration

The other thing to be aware of in this game was necessary the last time I looked at it and I doubt very much that things have changed.

Interest rate numbers are very tricky things that are easy to legitimately manipulate such that one is no longer doing an apples to apples comparison.

For instance the difference in an interest rate of 6% on an FD and a quoted 9% on an EMI for a car loan is much more than the apparent 3%, because both are calculated differently. I haven't done these calculations for many years now, but restated to be apples to apples, it would be 6% against probably what effectively is 16% for the quoted 9%, for a 5 year loan. The difference arises because the 6% is applied on a simple interest basis over longer terms, while the EMI calculation uses compounding over shorter terms such that saying 6% and 9% is no longer an apples to apples comparison, also because the interest so paid is converted to a 9% number assuming that principal amount has not been repaid till the end of the loan period, while in reality it has been repaid in increasing amounts every month.

For more clarity on this see: http://www.apnapaisa.com/personal-lo...st-rates-tips/

More such on google for those interested.

Last edited by Sawyer : 30th June 2017 at 11:05.
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Old 30th June 2017, 12:12   #26
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Sawyer View Post
The other thing to be aware of in this game was necessary the last time I looked at it and I doubt very much that things have changed.

Interest rate numbers are very tricky things that are easy to legitimately manipulate such that one is no longer doing an apples to apples comparison.

For instance the difference in an interest rate of 6% on an FD and a quoted 9% on an EMI for a car loan is much more than the apparent 3%, because both are calculated differently. I haven't done these calculations for many years now, but restated to be apples to apples, it would be 6% against probably what effectively is 16% for the quoted 9%, for a 5 year loan. The difference arises because the 6% is applied on a simple interest basis over longer terms, while the EMI calculation uses compounding over shorter terms such that saying 6% and 9% is no longer an apples to apples comparison, also because the interest so paid is converted to a 9% number assuming that principal amount has not been repaid till the end of the loan period, while in reality it has been repaid in increasing amounts every month.

For more clarity on this see: http://www.apnapaisa.com/personal-lo...st-rates-tips/

More such on google for those interested.
Normally loans are quoted nowadays with reducing interest.

Just did a rough calculation of my loan. The effective 'Flat' interest rate comes to 5.09% which is pretty good I must say.

Now coming to the more interesting part.

If you have the money to buy the car outright, should you buy on loan or cash ?

I am taking the example of my car which is a 2017 Honda City VMT iVtec purchased on loan at 9.1% reducing balance for 84 months (7 years).

Loan Amount: 10 Lakhs
EMI: INR 16149
Total payment in 84 months: INR 13,56,516

Effective yearly interest : (356516/7)= INR 50931 = 5.09%

Fixed Deposit % considered: 8%
If the 10 L is invested for 7 years the compounded value = INR 17,13,824

Net Profit: INR 17,13,824- INR13,56,516= INR 3,57,308

So according to this I would have lost 3.6L if I bought the car outright.

Even if the FD interest is 7% it is still INR2.5L and 6% around INR1.5L

Conclusion: It is better to buy the car on loan even if you have the money to pay in cash. Also the longer the tenure the better.
Whats even better for people like me, I donot need to wait for years to save that kind of a money to buy a better car in cash because if I do so I lose 35%. Ouch!!


Added Intangible Benefits:
1. Liquid Funds available in case of emergency. Sense of security.
2. Better CIBIL score due to good payment record against a 'Secured' Loan

Last edited by Altocumulus : 30th June 2017 at 12:34.
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Old 30th June 2017, 12:24   #27
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Smile Re: Your ideal car loan duration

Quote:
Originally Posted by smartcat View Post
Down payment: Whatever cash is available in savings account, fixed deposits and debt mutual funds. If the amount is more than the car value, no need to take a loan. No point in earning 4% to 7% interest pa and paying 10% to the bank
Quote:
Originally Posted by Sawyer View Post
I don't really understand this discussion and here is why:

Banks are in the business of making loans to make profit by making these at rates higher than what they pay you as interest on your money with them. So there is no way to come out ahead by taking a loan and keeping cash with banks in any way, in any kind of deposit.
Quote:
Originally Posted by Sawyer View Post
Why not liquidate the FD and not take the loan? Save the money by eliminating the interest rate difference. How does it make sense to invest at 6-7% and borrow at 12-14 from the same place?
Lets take 2 scenarios - Car value is 10 Lacs OTR and the buyer has 10 lacs cash in hand.

Let me know if the calculations are flawed. My intention is not to counter attack your opinions, just trying to figure the best feasible option.

1. Buyer buys car with cash in hand
2. Buyer buys car with 1 lac down payment and 9 lacs loan (lets take interest rate @ 10% for 5 years) and invests the remaining in FD @ 6% (note: there are options for 7% too)

Scenario 1:

Buyers has no EMIs to pay.

Scenario 2:

EMI @ Rs. 19122 for 60 months = Rs. 1147340. Buyer has paid 2.48 lacs as interest.

Remaining 9 lacs invested in FD @ 6% interest rate for years.

Total accumulated amount with interest at the end of 5 years would be Rs. 1204403 (interest amount of Rs. 3 lacs)

After 5 years

Scenario 1:

After 5 years buyer has a car with resale value of 40% - 60% of its initial value depending on the brand and model. He/she has no cash in hand having spent the entire amount on the car.

Scenario 2:

# Buyer has a car which has with resale value of 40% - 60% of its initial value depending on the brand and model.

# Buyer has total cash of Rs. 12 Lacs in FD.

# Added benefit: Buyer can claim income tax exemption under section 80C for the year 2017/18 for FD amount invested for 5 years (only for 2017/18)

Isn't scenario 2 the best option to buy a car?

Pleas let me know if I'm wrong.

EDIT: Oops, I was typing this post while Altocumulus had already conveyed what I wanted to say.

Quote:
Originally Posted by Altocumulus View Post
.

Even if the FD interest is 7% it is still 3.4L
Even @ 6% the amount is huge. Most banks offers FD @ 6% interest, some @ 7%

Last edited by Karthik Chandra : 30th June 2017 at 12:29.
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Old 30th June 2017, 12:34   #28
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Karthik Chandra View Post
Lets take 2 scenarios - Car value is 10 Lacs OTR and the buyer has 10 lacs cash in hand.

Scenario 2:

# Buyer has a car which has with resale value of 40% - 60% of its initial value depending on the brand and model.

# Buyer has total cash of Rs. 12 Lacs in FD.

# Added benefit: Buyer can claim income tax exemption under section 80C for the year 2017/18 for FD amount invested for 5 years (only for 2017/18)

Isn't scenario 2 the best option to buy a car?

Pleas let me know if I'm wrong.

EDIT: Oops, I was typing this post while Altocumulus had already conveyed what I wanted to say.



Even @ 6% the amount is huge. Most banks offers FD @ 6% interest, some @ 7%
You forgot that you apparently invested 11.xx lacs of your earnings in paying EMIs. However, i am always in favour of taking loans for anything and everything simply because you always have the liquid in hand for rainy days. Evenif you end up paying some interest, the risk of loosing on liquid is almost minimal that too on a depreciating asset.
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Old 30th June 2017, 12:45   #29
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Altocumulus View Post
Loan Amount: 10 Lakhs
EMI: INR 16149
Total payment in 84 months: INR 13,56,516

Effective yearly interest : (356516/7)= INR 50931 = 5.09%

Fixed Deposit % considered: 8%
If the 10 L is invested for 7 years the compounded value = INR 17,13,824
Good question, and I need to take some time to think to give the full answer to what flies in the face of logic and common sense in the outcome in the quote above, which is as under:
This would imply that, say, ICICI Bank, will take Rs 13.56 lakhs from you and give you Rs 17.13 lakhs in return. That isn't possible.
But I agree I have to also give a longer answer that explains the fallacy, unless someone else here that is smarter than I beats me to it!
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Old 30th June 2017, 13:00   #30
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Default Re: Your preferred car loan duration

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In Thamizh there's a saying "Kadan pattar nenjampol kalanginan Elangai vendan" referencing a quote in Ramayana, "Ravana's heart was filled with as much sorrow as one has been in debt". To make things clear, debt is something that was totally to be avoided & stay off said right from few 1000 centuries ago in our culture.

But in today's world, there are people without aids, but not without debt. It's like a cancer spreading through out. There're some positive sides to it as well, like, some of my friends from college days, they've luxury villas (in Crores) running at very low EMIs (in few 1000s) with best part being when they started, they were in rented houses; and no! they're not running business nor are they vice presidents or CEOs. Some of my friends own 2 houses in US of A as well with house helping to take care of their EMIs. Some of them have always been in debt & yet they've never failed to own anything & have an excellent credit history. Personally I know people who opt for 10 years loan (on house) & have closed in less than 7 years as well; best part here is, they are single income family & were not misers either.

Personally to me, traditional practices about debt are always safe & gives peace of mind. But it all depends upon how seriously folks are with their finances; stay disciplined...no debt goes out of control, but there could be another argument saying, stay disciplined...you'll not need a loan as well. But the thumb rule always is that, never bite more than you can chew

Last edited by aargee : 30th June 2017 at 13:24.
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