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View Poll Results: My ideal car loan tenure is...
0 years. I buy my cars outright 64 16.37%
1 year 8 2.05%
2 years 13 3.32%
3 years 118 30.18%
4 years 29 7.42%
5 years 115 29.41%
6 years 0 0%
7 years 40 10.23%
8 years & over 4 1.02%
Voters: 391. You may not vote on this poll

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Old 30th June 2017, 13:01   #31
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Sawyer View Post
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!
Very easy brother.

Hint: that Rs. 16,149 monthly cash - instead of paying EMIs, can be invested in Fixed Deposit/debt MF to earn that 8% pa interest.

Remember that EMIs are being paid from future cash flows. Those who don't have a loan on their books can invest their future cash flows to rebuild that FD kitty all over again.

Last edited by smartcat : 30th June 2017 at 13:07.
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Old 30th June 2017, 13:06   #32
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Karthik Chandra View Post

Even @ 6% the amount is huge. Most banks offers FD @ 6% interest, some @ 7%
6% is now offered by some banks in normal savings accounts, you wouldn't need an FD for it

Quote:
Originally Posted by Mission_PGPX View Post
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.
Look at it in terms of total outflow in 7 years.

In my example, if I bought the car on loan and fixed 10 L my total outflow in 7 years will 6.5L viz. 10L - 3.5L (plus down payment of 2L) which would be INR 8.5L for a VMT. If brought outright it will be the INR 12L.

Quote:
Originally Posted by Sawyer View Post
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!
The reason behind it is the reducing principal interest. Maybe that's why the banks give you the difference in interest if you take the car against an FD. Ofcourse I am open to thoughts.
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Old 30th June 2017, 13:14   #33
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Default Re: Your preferred car loan duration

Am surprised that so many salaried folks want to buy cars on EMIs. Even more surprised that they are getting basic math wrong.

If you buy a car with a ₹ 10 lakh 4 year loan, your EMI is ₹ 25123 (@9.5%). If you want to invest the money saved by borrowing in FDs (which mature each month to pay the EMI), and earn 6% on it, you would need to be able to invest ₹ 10.7 lakhs to get ₹25123 out each month. In short, you lose ₹70 k by borrowing. This ignores taxes - interest in FDs is taxable. Assuming folks who buy ₹10 lakh cars are in the 31% tax bracket, the loss actually rises to ₹110000.

It does not make sense to borrow for a car and invest in FDs.

As for equity investments, they are risky. You have no certainty you will have a positive return when your EMI is due. Borrowing on a car to invest in equities could leave you with no car and no principal (unless you use other savings to pay your EMIs).

It's of course very different for businesses. My company gets a tax shield on interest and on depreciation on cars it buys for employees - and passes that onto them through a car perk scheme. But if you are buying a personal car, upfront payment is the way to go.
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Old 30th June 2017, 13:41   #34
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Default Re: Your preferred car loan duration

Quote:
Originally Posted by Hayek View Post
But if you are buying a personal car, upfront payment is the way to go.
I think the main reason why salaried folks take car loans is because they don't have enough liquid currency to pay for the full amount of the car upfront. They can only arrange for the down payment and the EMI facility makes it easier for them to own the car they like.

A person earning 2 lakhs per month as salary in hand can easily save for three to four months and pay upfront for a car costing 4 lakhs.
But then he is earning 2 lakhs a month, why would he want to drive a low segment car.
He would rather want to drive a million rupee car. And these days, even the top model of Elite i20 costs above that. So he takes a loan.

But if he can arrange those 10 lakhs out of his savings, then it's the way to go!

Also, in case of any financial emergency, it is easier to break a FD than to sell the car and incur depreciation loss.

Last edited by Sherlocked : 30th June 2017 at 13:56.
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Old 30th June 2017, 14:08   #35
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by smartcat View Post
Very easy brother.

Hint: that Rs. 16,149 monthly cash - instead of paying EMIs, can be invested in Fixed Deposit/debt MF to earn that 8% pa interest.

Remember that EMIs are being paid from future cash flows. Those who don't have a loan on their books can invest their future cash flows to rebuild that FD kitty all over again.
Let us look at this

Scenario 1: Loan

Outgoing EMI: 16149 *84 = INR 1356516
Down Payment : 2L
Total Outgoing in 7 years: 1556516

Total money in hand investing 10L after 7 years= INR 1713824

Scenario 2: Buy outright and invest EMI equivalent in RD

Cost paid for Car: 12L
Total RD payment: INR 1356516
Total outgoing : 2556516

RD maturity amount @7.5%/ money in hand after 7 years: INR 1784803

Which one looks better or am I going wrong somewhere ?

For business folks the amounts would look even better because their outgoing will be even lesser in Scenario 1.
A lumpsum amount in hand invested will always be better than building that again over time.
A loan is a commitment, a dagger always hanging if by chance, god forbid, there is a mishap or you lose your job. It is a risk, specially if you donot have 10L to invest. However, if you have it, I think it is better unless I am doing something drastically wrong with the calculations.

Last edited by Altocumulus : 30th June 2017 at 14:20.
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Old 30th June 2017, 14:11   #36
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Default Re: Your preferred car loan duration

Some back-of-the-envelope calculations for a salaried individual that I did:

Take the case of a 30-year-old salaried person (8 years experience). We set a maximum outlay per month of about 30% of disposable income on vehicle expenses like EMI, fuel, maintenance & insurance.
This person wants to change cars every 5 years.

Current Savings: 5 lakhs
Current Disposable income: 1 lakh per month
Currently has 3 year old bike, resale value today 40K
Current running expenses on bike: 3K per month (let us assume it stays constant for 5 years)

Consider a typical C-Segment car costing 15 lakhs OTR today.

If this person buys the car today on loan:
Down Payment: 5 lakhs
Loan EMI (10 lakhs for 5 years): 21K
Running expenses on car: 6K per month (fuel, maintenance, insurance)
Total Expenses per month: 27K
And he/she gets to enjoy the utility value of the car today.
The 40K from sale of the motorcycle can be used for accessories, or putting it away for some other unexpected expenses.

Lets say he/she invests the equivalent amount instead of buying a car now, in order to pay cash down after 5 years. He/she thus forgoes the utility value of a car for 5 years by postponing the purchase.

Invest 5 lakhs in FD for 5 years: Yields 6,73,428
Invest 24K per month (27K EMI+car expenses, minus 3K bike expenses) for 5 years in RD: Yields 17,15,039
Total yield: 23,88,467
ADD further savings in other instruments of about 3 lakhs in these 5 years.
Amount available to buy a new car after 5 years: 26,88,467

So, by saving, he/she could get to buy a vehicle for 27 lakhs OTR after an additional 5 years of riding a motorcycle instead of driving a car - for cash down, at age 35 years.

If he/she had bought the car today instead of saving, then at the end of 5 years
Resale value of car: 6 lakhs
Disposable income after 5 years: 1.6 lakhs per month (same role, income rises in line with regular yearly hikes only)
Savings in other instruments of about 4 lakhs

Let us say he/she wants to buy that same car costing 27 lakhs OTR

Buying that car on loan:
Down Payment: 10 lakhs
Loan EMI (17 lakhs for 5 years): 36K
Running expenses on car: 12K per month (fuel, maintenance, insurance)
Total expenses per month: 48K - which is right on the limit of 30%

If he/she had bought that car using cash, then running expenses would be only 12K per month. Giving the opportunity to invest/spend the remaining 36K that would have gone into EMI. So 5 years after buying the 27-lakh car with cash, putting the 36K away in RD:

RD yield 25,72,558
Savings in other instruments of about 6 lakhs
Resale value of car: 8 lakhs

Total cash money available: ~40lakhs
If salary continues to grow in line with only yearly hikes, disposable income will be 2.5 lakhs per month. Allowing this person to afford expenses of 75K per month on the car. If we split it into running expenses of 25K per month and EMI 50K per month, then on a 5-year tenure, he/she can take on a loan of 23 lakhs. Giving a total budget of 63 lakhs. Which is well into the territory of the luxury segment. I guess, for a person at age 40, taking on a loan which is less than 50% of the cost of a car, for the enjoyment of luxury segment, can be justifiable?

If, on the other hand, the 27-lakh car had been bought on loan, keeping the same income after 5 years, he/she would have down payment 14 lakhs plus 23 lakhs on loan, giving a total budget of 37 lakhs.

Last edited by KiloAlpha : 30th June 2017 at 14:13. Reason: rewording for clarity
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Old 30th June 2017, 14:12   #37
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Altocumulus View Post
The reason behind it is the reducing principal interest. Maybe that's why the banks give you the difference in interest if you take the car against an FD. Ofcourse I am open to thoughts.
I need to find a better answer because even using the FD rate of 6%, you will say there is a profit to be made by borrowing! Let's see if someone else does that before I do, using your specific numbers modified for a 6% FD rate.
Quote:
Originally Posted by Sherlocked View Post
in case of any financial emergency, it is easier to break a FD than to sell the car and incur depreciation loss.
Yes, I can see the point in this; but this convenience will come at a cost and not at a profit!

Last edited by Sawyer : 30th June 2017 at 14:16.
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Old 30th June 2017, 14:36   #38
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by Altocumulus View Post
Which one looks better or am I going wrong somewhere ?
For business folks the amounts would look even better because their outgoing will be even lesser in Scenario 1.
A lumpsum amount in hand invested will always be better than building that again over time.
Assuming 7% pa over 7 years as FD interest rates, you are losing approximately Rs. 2 Lakhs. I'm leaving out TDS/Income tax for ease of calculations. I'm using this tool to make calculations -
http://www.moneycontrol.com/personal...ding-tool.html

Scenario 1: Taking a Loan

Down payment Rs. 2 Lakhs
Loan of Rs. 10 Lakhs for 7 years (reducing balance)
EMI: Rs. 16,149 for 84 months.

Meanwhile, your Rs. 10 Lakh in FD becomes Rs. 16,05,781 at 7% interest rate (use moneycontrol.com tool)

Name:  scenario1.jpg
Views: 1049
Size:  48.4 KB

Scenario 2: Break the FD

No liability. Instead, invest Rs. 16,149 every month in FD, to earn 7% per annum. In the moneycontrol.com tool, enter starting amount as zero (because you cleaned out the FD) but enter monthly investment as Rs. 16,149

Name:  scenario2.jpg
Views: 1046
Size:  71.5 KB

Result? You will have Rs. 17,94,439

Name:  scenario3.jpg
Views: 1044
Size:  33.3 KB


So, you are paying extra interest of Rs. (17.94 - 16.04) = Rs. 1.9 Lakhs.

Last edited by smartcat : 30th June 2017 at 14:37.
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Old 30th June 2017, 14:44   #39
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Default Re: Your preferred car loan duration

Voted for 3 years. I retain my cars for 7 years or so typically, so that's enough to take the sting out the initial purchase and enjoy a few years of liability-free ownership as well.
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Old 30th June 2017, 15:04   #40
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Default Re: Your preferred car loan duration

I am n my fourth car now. Here is what I did:
1. 1st Car: Bought a new hatch on a 5 year loan.
2. After 1.5 years bought a used sedan, so sold the hatch, closed the earlier loan and took another 5 year loan for this car.
3. Sold the sedan and bought another one which was already on company lease. Paid off the difference in market value for the 1.5 year old sedan and took up the balance 1.5 year lease deduction from my salary. This was the most tax friendly move I made in my car purchases. Sold this sedan after 3.5 years of usage for 4L.
4. Bought my Rapid for 10.5L change. Took a loan for 4L for one year. Pooled in proceeds of my old sedan and the balance from savings.

Since then, my principle is to avoid taking loans for anything depreciating. This includes costly LED TVs, fridges, mobile phones etc. If you need to take a loan for any of the above, you clearly cannot afford it at this time. So wait till you have saved the amount , then buy it. The only thing worthy of taking a loan is an asset like a House.

If I do need to take a loan for a Car (since this is the next costly thing you would purchase after a house), I would keep the duration as minimal as I can afford. The ideal scenario for me is 1 to 2 years. If it is not affordable, wait, save, then take a loan.


I also thank Rush and Tbhp for the excellent article on why you should not sell off your 5 year old vehicle. Thanks to this, my Rapid is my longest serving car and has completed five years.
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Old 30th June 2017, 15:27   #41
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Default Re: Your preferred car loan duration

We also have to consider the "value" of the EMI here over a period of years.

Let say one buys a car in 2017 where the monthly EMI is 20,000/- for 5 years. The net "value" of his first EMI will be exactly the same i.e 20,000/-. However as the rate of inflation kicks in, this value will keep decreasing over the years. If we assume, the rate of inflation as 6%, then the value if this EMI becomes 14,678/- in the fifth year, whereas the "value" of his income always remains at the current rate. Therefore, even though mathematically he pays a total amount of 20,000 * 60 = 12,00,000/- in EMIs, he pays a much lesser "value" amount.

On the other hand, when someone buys the car outright, he is paying the complete "value" of the car at the beginning itself which will keep depreciating over the years.

I am not even considering the investment scenario here such as FDs or equity which will add even more "value".
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Old 30th June 2017, 15:39   #42
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Default Re: Your ideal car loan duration

Quote:
Originally Posted by smartcat View Post
Assuming 7% pa over 7 years as FD interest rates, you are losing approximately Rs. 2 Lakhs. I'm leaving out TDS/Income tax for ease of calculations. I'm using this tool to make calculations -
http://www.moneycontrol.com/personal...ding-tool.html

Scenario 1: Taking a Loan

Down payment Rs. 2 Lakhs
Loan of Rs. 10 Lakhs for 7 years (reducing balance)
EMI: Rs. 16,149 for 84 months.

Meanwhile, your Rs. 10 Lakh in FD becomes Rs. 16,05,781 at 7% interest rate (use moneycontrol.com tool)

Attachment 1652644

Scenario 2: Break the FD

No liability. Instead, invest Rs. 16,149 every month in FD, to earn 7% per annum. In the moneycontrol.com tool, enter starting amount as zero (because you cleaned out the FD) but enter monthly investment as Rs. 16,149

Attachment 1652645

Result? You will have Rs. 17,94,439

Attachment 1652646


So, you are paying extra interest of Rs. (17.94 - 16.04) = Rs. 1.9 Lakhs.
Even with your interest % example, in both scenarios we are paying an EMI/RD of the same amount. However, in case of a loan you are keeping the 10L with you and in the other case you are giving away that 10L apart from the monthly RD payments. Your outgoing is much higher. You will pay 23,56,516 and have INR 17,94,439 at the end (loss of 5.6L) while by taking a loan I will pay INR 13,56,516 total and have INR 16,05,781 which is a profit of 2.5L. Even if I pay 30% of the interest in tax which 181500 I am still at a profit. Also it is not that your RD wouldn't attract tax. So losses are higher.

Last edited by Altocumulus : 30th June 2017 at 15:54.
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Old 30th June 2017, 15:47   #43
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Default Re: Your preferred car loan duration

This is actually fairly simple.

Certain people (businesses, professionals etc) may have an actual expense / tax advantage / offset gained by borrowing money. To them there is an element of structuring involved.

For a salaried person to whom the above applies - there is no two ways about it - upfront is cheaper!! Period! Loans and EMI decisions should only be because you don't have the money today to buy the car you want. It is a need, not a way to achieve tax efficiency option.
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Old 30th June 2017, 17:13   #44
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Most of the financial calculation provided by members are of absolute merit, but somehow based on assumption and not on reality.
My 3 generations are salary folks, so let me explain why I went for loan and then why I prefer 3 year loan.

Let me come to the basic hypothesis of all the calculation, I am considering a person with 8 years of experience and aged 30 as I believe most people buy their first car at that age.
Quote:
Imagine a salaried folk with 8 years of experience have 10 lac
Let me emphasize on this part. The salary guy has is income in EMI (kidding), means he get his fixed salary every month. The typical calculation of a salaried person goes like:

Salary - TDS = Fixed expence (like of rent bills etc) + Household expenses + Savings

Now our average salaried guy who is 10 years experienced might have started with his job with an average of 25K per month 8 years back. His savings per month wont let him invest in FD / MF for first 2 years. Again, the savings for a salaried after monthly expenses are already taxed at source and he only pays tax on interest.

3rd Year onward, he started investing in FD, RD and MF. Remember, as monthly salary as working capital and no fixed capital backup, ideal investment profile would be 30% liquid (short term FD and cash at bank), tax savers fund as he would get benefit up to 1.8 lac per year under 80C and rest on equity.

In next 3 year, he would acquire family (again considering average Indian with a job getting married at age of 28) and monthly expense would rise considerably and salary increment percentage would gradually decrease. He still sticks to 30% liquid, 1.8 lac under 80C and rest on equity.

At current with 8 year experience and with a family he would need a mobility aka car. He had accumulated 10 lac in savings out of which, 30% i.e. 3 lac would be his contingency fund that he wont touch. Out of rest, he can not touch the 80C investment, that he had made in last 3 years as they have at least 3 years lock-in period. So he has a capital to spend of 2.5 lac.

Going by cash out payment, he can only afford a Nano.

He sees, he can encash his 80C investment every year there after. Again, he has constant source of income every month and he can bugget and carve out certain amount every month as EMI.
He pays 2.5 lac as down payment and take a loan of 3 lac for 3 years with EMI at 9600/- pm at 10%. If he goes for full term EMI, he would end of paying 45K in interest. at 5.5 lac he would end up with a B segment family car which is definite improvement over nano.

Else, he would wait for 3 years and invest those 9600/- per month in SIP scheme in equity and after 3 years, with investment of 3.5 lac he would get a return of around 4.3 lac. Apart form his contingency and fixed savings, he could even carve out another 4 lac from his savings. He would have 8.5 lac to buy a car.
Under these 3 years, considering inflation with 8.5 lac, he would get a B+ car which is marginally better than B segment and loose 3 years of car ownership.

Most of salaried person doesn't calculate profit and loss very minutely as majority of the income is already tax deducted at source (though they should, but they are salaried and not businessmen ).

Why 3 years? If you see the interest chart, interest rates are generally higher for less than 2 years of loan, equate to higher EMI. Again for more than 3 years loan, one would end up paying marginally higher total interest. A 3 years loan would give a balanced approach of reasonable interest and quicker loan repayment.

The above thought is what I employ to get me a car 5 years back and membership to TBHP.

Last edited by PetrolRider : 30th June 2017 at 17:20.
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Old 30th June 2017, 18:47   #45
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Default Re: Your preferred car loan duration

According to me, job security is one of the key parameters in taking a loan.

A sarkari naukar is at a very low(no) risk for taking a loan. As their future is secured, they can spread their financial investments over decades. IMHO, it would take a real noob to commit a financial mistake in such a case.

Whereas a private sector employee esp. IT sector, has to be a little judicious in financial planning.

Quote:
Originally Posted by Sawyer View Post
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!
+1. Sounds too good to be true. I want my mathematically challenged brain to solve the brain teaser.
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