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Old 19th December 2008, 17:59   #1
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Default Car loan what am I missing here ?

Hi,

i am total newbie to car and car loans. HDFC has quoted me EMI 6885 @14.5% for 36 months for sum of 2 Lac.

means total i pay around 2.48 Lac in 3 year.

now if i put this amount in Fixed Deposit at 10%

after 3 yrs i get around 2.68 Lac.

means its profitable to take loan.

but in this case where butter and bread for banks ? i know i am missing something here.

can someone please point it out ?

Thanks
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Old 19th December 2008, 18:57   #2
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Quote:
Originally Posted by JustStarted View Post
Hi,

i am total newbie to car and car loans. HDFC has quoted me EMI 6885 @14.5% for 36 months for sum of 2 Lac.

means total i pay around 2.48 Lac in 3 year.

now if i put this amount in Fixed Deposit at 10%

after 3 yrs i get around 2.68 Lac.

means its profitable to take loan.

but in this case where butter and bread for banks ? i know i am missing something here.

can someone please point it out ?

Thanks
Mate 14.5% is quiet high.
Try PSU banks like SBI, PNB etc. they ar giving loans around 12-12.5% .
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Old 19th December 2008, 19:18   #3
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Juststarted - your question is quite genuine - but banks do make money and the equation for how much they make is not as simple as what you earn on a deposit Vs what you pay on a loan

average cost of funds for a bank would be much lower than 10% - all though it varies across banks depending on various factors - its around 6-8% now

so its quite ok for them to offer a loan at 14.5% and still make money

now - in this scenario where the 3 year deposit rate is giving you good returns, you could go for the 3 year loan ( instead of using ur own money ) - but be sure not to foreclose - because then you would lose ( more interest is recovered in initial 2 years than principal)

also shop around for better deal - DONT COMPARE THE RATES ACROSS BANK
COMPARE THE EMI for SAME LOAN AMOUNT/TENOR and COMPARE OTHER CHARGES
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Old 19th December 2008, 19:31   #4
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actually i have cash to buy new car.

but a friend is suggesting me to take loan, he thinks its not a good idea to take car all in cash because of IT dept. my CA also suggested same.

now when i compare actual amount i pay vs amount i earn on FD. i am in profit.

so its more profitable to take loan. i still can't believe and think there is some glitch somewhere.

really in FD i earn more than i pay in my load ? even at 14.5%?

no PSU bank ready to give me loan i am freelancer with no business profile.
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Old 19th December 2008, 19:55   #5
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There is a thread on car loans and interest rates and all things associated with it somewhere. Just do a search.

For starters go to Nationalized banks. Interest rates are cheaper, no hidden charges, partial and full prepayment generally don't attract any penalty. Only drawback is it takes a week to 10 days for loan to get processed. But you will save a lot on interest and other hidden charges. Documentation is also stricter.
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Old 19th December 2008, 22:43   #6
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Quote:
Originally Posted by JustStarted View Post
Hi,

i am total newbie to car and car loans. HDFC has quoted me EMI 6885 @14.5% for 36 months for sum of 2 Lac.

means total i pay around 2.48 Lac in 3 year.

now if i put this amount in Fixed Deposit at 10%

after 3 yrs i get around 2.68 Lac.

means its profitable to take loan.

but in this case where butter and bread for banks ? i know i am missing something here.

can someone please point it out ?

Thanks
The loan is on monthly reducing principal. Had u being paying lumpsum for ur loan at the end of 3 years then the amount would be paying would have been more than that earned with FD.

For the EMI amount that u are paying for the first month., u would be looking interest for remaining 35months...

so you should compare your Rs. 2Lac FD as 36 fds of Rs. 5555.55 which mature at the end of 1,2,3,...35,36 months u will find that the total outflow as per to EMI is more than the money u are earning by FDs.
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Old 19th December 2008, 23:12   #7
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Quote:
Originally Posted by JustStarted View Post
Hi,

i am total newbie to car and car loans. HDFC has quoted me EMI 6885 @14.5% for 36 months for sum of 2 Lac.

means total i pay around 2.48 Lac in 3 year.

now if i put this amount in Fixed Deposit at 10%

after 3 yrs i get around 2.68 Lac.

means its profitable to take loan.

but in this case where butter and bread for banks ? i know i am missing something here.

can someone please point it out ?

Thanks
the answer to your question is that
1. Loans are usually with reduicing balance. when you pay the 1st emi, a certain portion of your prinicipal loan amount is reduced. so as you pay, the principal decreases, so does the interest.
2. in FD, there is complete reversal. as time increases the interest gets cumulatively added to the prinicipal.

i hope i have explained your query
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Old 20th December 2008, 02:43   #8
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Quote:
Originally Posted by JustStarted View Post
Hi,

i am total newbie to car and car loans. HDFC has quoted me EMI 6885 @14.5% for 36 months for sum of 2 Lac.

means total i pay around 2.48 Lac in 3 year.

now if i put this amount in Fixed Deposit at 10%

after 3 yrs i get around 2.68 Lac.

means its profitable to take loan.

but in this case where butter and bread for banks ? i know i am missing something here.

can someone please point it out ?

Thanks
To substantiate on what drkunaldas has said, this is how banks make money-
On a loan of 200,000 Rs that they give to you, they make 48 thousand Rs. over a period of 3 years. But you return a part of that money to the bank every month. The bank then re-lends that money that it gets from you to someone else and makes money on that as well. So while the total cost to you may seem like 48,000 Rs. on a 200,000 Rs loan, the bank actually makes a lot more on that by rotating the money you pay as EMIs to other borrowers.
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Old 20th December 2008, 08:21   #9
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There is also the matter of a certain percentage of the money going from the car dealer to the bank. Else car loans can never be cheaper than home loans. For example, I had got my car loan at 7.25% 3 years ago and the home loan rate was higher than that.

Also check out the actual payments. Usually they take 1-2 months payment upfront. So effectively, the interest rate is higher. Meaning that though you have paid up a couple of installments upfront, they charge you interest on the entire loan amount. I have found that most of teh times, the only way to arrive at the total costs is to take into account the entire payout and the term. (a 3 year loan for example will get over in 34 months)
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Old 20th December 2008, 20:39   #10
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Please get in touch with any PSU bank - since you are in RJ, why not try SBBJ?
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Old 20th December 2008, 22:31   #11
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As others have put in, the bank is making money because your principle is reducing everymonth.

Try with reccuring deposit with 10% with Rs 6885/-, starting from zero amount and you will find that you are getting much less from the bank.

If your papers are all clear and you have the money with you, and can't invest in something which gives you more than 14.5% return, then it is better to pay in cash. Except in case of business establishment where lot more factors such as depreciations etc are involved.
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Old 21st December 2008, 08:18   #12
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PSU ? even private banks not ready to give me loan .

only one reason that i don't have that kind of business profile.most of my work is through internet , no local business so i don't have fancy setup they are looking for.

yes i have the cash to pay in full but my CA advised me to take some loan just because he don't want me to come in eyes of IT people.

so if i take loan at 14.5 % and put cash in FD

at the end of 3 yr. i get

2.68 lac. and i pay total around 2.48 against the loan.

this is not a bad equation if i see what comes in my pocket and what goes out of my pocket.

i will go for loan. (if i get it ).
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Old 24th December 2008, 18:10   #13
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Quote:
Originally Posted by JustStarted View Post
PSU ? even private banks not ready to give me loan .

---

this is not a bad equation if i see what comes in my pocket and what goes out of my pocket.

i will go for loan. (if i get it ).
The current rates for 5 years term loan in India in a private bank should be anywhere between 12.25 - 12.75 not 14.5 %.
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Old 24th December 2008, 18:57   #14
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Quote:
Originally Posted by JustStarted View Post
PSU ? even private banks not ready to give me loan .

only one reason that i don't have that kind of business profile.most of my work is through internet , no local business so i don't have fancy setup they are looking for.
In that case, book an FD and use that FD as collateral.

That is since you have cash and are taking loan since it benefits you from tax angle.

By booking FD, you make this a zero risk loan for bank and you do not pay any tax on FD interest if that is offset by some other expense in your business (talk to your CA for details).
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Old 25th December 2008, 13:36   #15
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Guys, which is better?

A loan for 3 years or for 2 years, if I am considering a prepayment (prepayment penalty: 3% of remaining principal loan). Should I even go for a pre-payment?

I too am a freelancer and this ROI has been quoted by DSAs of Kotak and ICICI. The banks themselves have refused, but I guess DSAs have an arrangement with banks. The ICICI DSA has waived off processing charges and stamp charges would be 0.5% of the loan amount. ROI quoted by both is 15.5%
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