Car Loan against Fixed Deposits

[WanderNomad]

My Dad is also with a Nationalised Bank. Got my Scorpio financed and prior to that the Accent from his bank. Low rate of interest, no proc fee, no hidden charges, daily reducing interest and pay as much as you like. I paid more than the EMI amount as per funds availability and Accent loan was over in 1.5 years.

But I am unable to understand one thing here, why take a loan when you have an FD? Why not simply break the FD and pay cash down. Because anyways till the time loan isnt paid up, the FD cant be cashed. Even if it matures then also it will be reinvested (the bank will always keep a deposit equal to Principal outstanding of the loan at anytime).

Originally Posted by appuchan

Exactly! This is like asking is if its better to buy car with outright cash or with the help of loan. The response is not easy since that depends a lot on the loan terms, inflation over the period, interest rate changes, depreciation rules, cash flow etc...

Agreed. I think it boils down to the age old discussion of cash down vs financing.

[nkapoor777]

Originally Posted by GTO

Other benefits:

- No waiting for approval
- No endorsement on the RC book
- No prepayment / foreclosure charges
- Easier to sell the car
- Rate will be the same whether you are buying a new car, used car or an import

Does anyone see a disadvantage that we've missed? I'd love to hear you out since I am seriously considering this for my next car.

@GTO: The list of benefits is what would tempt someone to go for this type of an offer. Howver, we should be aware of a few things before we opt for such an offer:

1. BANK would not lose money on this trade irrespective of the interest rate environement. In fact, it is like a guaranteed fees for the bank (1% or 2%) over and above the interest rate payable on your deposit amount.

Look at it this way, a bank could have been over-eager to garner deposits to feed its lending practice or encountering a shortage of funds and might have paid through its nose to get your deposit (that's what most banks did in the not so distant past with FD rates in low double digits). Now in a falling interest rate scenario, such high cost deposits are really a burden on the bank's margins (since lending rates are falling) and if the bank can find a way to make a guaranteed fees on such high cost deposits without worrying about the credit risk (since they will put a lien on your FD), they will just love it.

Let me put a twist to this case. Lets say you hold an FD @ 10% pa and the bank is willing to lend @ 11% pa on this FD currently. Now as we are aware, the current lending rates (as well as the deposit rates) are on the decline in the near future. Now lets say the current going rate for a conventional car loan is around 13% pa (after recent cuts in PLR - Note: I haven't been in the market for one, so could be off with the rates). Given the declining trend and the signals being given out by the Govt as well as RBI, we could be staring at much lower lending rates in the not too distant future. These rates which are currently at 13-14% pa could well be down to 10% pa or even lower in the next 12-18 months. Who would be smiling then? You, the customer or the BANK.

It is us, the consumers who have to shell out the moolah any which way.

My take: If one needs to make a decision in the short term, it is prudent to opt for floating rate loans and play out this cycle of declining interest rates. Or defer the purchase decision and sit on the sidelines to lock in to a much lower fixed rate car loan in the near future.

PS: Look at the FD Maturity Date - If the maturity date of the FD is approaching, it might be prudent to opt for breaking the FD (after payment of any premature closure penalty which could be miniscule) and make the purchase in cash (as mentioned by d_himan above). However, if the cutomer has locked into a long term FD and the premature closure is proving too expensive, the option of Loan against Deposit can be considered.

[GTO]

Originally Posted by Fountainheader

This sounds-to-good-to-be-true offer

Originally Posted by d_himan

Therefore, this minimum 2% is always the extra hit on your pocket.

D_Himan : I wouldn't say that the minimum 1 - 2% increment is always an extra hit on your pocket. Tell you why:

In a typical car loan (yup, I am talking EMI-based car loan versus just extended credit facility on the basis of a fixed deposit), your interest payments to the bank diminish with time. Primary reason being, the EMI contains not just interest, but also a repayment of principal amount. That's why in the amortization schedule, we see interest being such a high % of the EMI initially (vis a vis contribution to principal), and then gradually coming down to a negligible value in the final year.

Even at a 1 - 2% difference, in the final 18 months, the bank will be paying you 9% interest on the full amount of 10 lakhs. While you are paying them 10 - 11% interest on prolly 5 lakhs (principal amount reduced with time).

I know there are lots of ifs and buts in the entire argument

Let me tell you one more (to my favour):

1. Interest expense is a tax deductible for me (as an entrepreneur).

2. I get depreciation benefits on the car as well.

Originally Posted by WanderNomad

Why not simply break the FD and pay cash down.

Pros & cons vary from person to person. All the benefits I outlined earlier, plus tax benefits, make it worthwhile for me to take a loan against FDs. Well, I invest in a certain amount of FDs anyways!

Because anyways till the time loan isnt paid up, the FD cant be cashed.

Look at the FD Maturity Date - If the maturity date of the FD is approaching, it might be prudent to opt for breaking the FD

Fantastic point guys. Makes sense for the FD to match or exceed the loan tenure.

Originally Posted by nkapoor777

In fact, it is like a guaranteed fees for the bank (1% or 2%) over and above the interest rate payable on your deposit amount.

Agreed. But on reducing balance, you are paying 11% to the bank on a much smaller amount than they are paying you the 9% on. Of course, this is in the later half of the tenure.

These rates which are currently at 13-14% pa could well be down to 10% pa or even lower in the next 12-18 months. Who would be smiling then? You, the customer or the BANK.

That isn't relevant to this discussion only. It is applicable to any car loan, irrespective of whether the same has been availed against an FD or not.

I made this point earlier:

Now, @ 1% more, the EMI comes up to 29,xxx. For a loan of 3 years, you would have effectively paid them about 10.5 lakhs back. However (and again) in the same time, your FD has matured to a value of 13 lakhs!

Guys, I'd appreciate any corrections to my thought process thus far. This is a crucial discussion and one that will influence the way I buy my future cars. Please keep those comments rolling.

[whitemm550]

guys,
just hold on. let me tell you that whenever you go for a EMI based loan, its always on monthly diminishing intrest, whereas when you plonk in a FD in the bank, then it is a Fixed Rate, so when the bank charges you 1-2% more above the rate of intrest you draw from the FD, then it means you end up paying Fixed rate to the bank. let me explain.
say the rae of intrest on a EMi based loan is 12% reducing rate, that means you end up paying approx 6.5% flat rate to the bank, over the loan tenure, but when u plonk in a fd @ 12 % that means you actually get flat 12% from the bank.

[WanderNomad]

Originally Posted by GTO

Let me tell you one more (to my favour):

1. Interest expense is a tax deductible for me (as an entrepreneur).

2. I get depreciation benefits on the car as well.

Pros & cons vary from person to person. All the benefits I outlined earlier, plus tax benefits, make it worthwhile for me to take a loan against FDs. Well, I invest in a certain amount of FDs anyways!.

GTO Sir when it comes to cost of ownership and working out the best deal, you are the master. In fact everyone in my office and extended family has read your thread on "Cost of ownership of the Car".

I also meant the same thing that breaking the FD vs financing is similar to the cash down vs financing paradox and benefits vary from person to person. For a normal salaired person who gets no interest / depreciation benefit, why should he pay even 2% more. He gets 9%, he pays 11% so why pay this premium of 2% also (of course the cost of breaking the FD shouldnt be high here).

[GTO]

Originally Posted by whitemm550

let me tell you that whenever you go for a EMI based loan, its always on monthly diminishing intrest, whereas when you plonk in a FD in the bank, then it is a Fixed Rate, so when the bank charges you 1-2% more above the rate of intrest you draw from the FD, then it means you end up paying Fixed rate to the bank. let me explain.
say the rae of intrest on a EMi based loan is 12% reducing rate, that means you end up paying approx 6.5% flat rate to the bank, over the loan tenure, but when u plonk in a fd @ 12 % that means you actually get flat 12% from the bank.

Fantastic. That's exactly what I meant to say here:

In a typical car loan (yup, I am talking EMI-based car loan versus just extended credit facility on the basis of a fixed deposit), your interest payments to the bank diminish with time. Primary reason being, the EMI contains not just interest, but also a repayment of principal amount. That's why in the amortization schedule, we see interest being such a high % of the EMI initially (vis a vis contribution to principal), and then gradually coming down to a negligible value in the final year.

For a normal salaired person who gets no interest / depreciation benefit, why should he pay even 2% more. He gets 9%, he pays 11% so why pay this premium of 2% also (of course the cost of breaking the FD shouldnt be high here).

Look up mine & White550s discussion. The loan rate is a reducing balance.

[WanderNomad]

Confirmed with my Dad. The current loan against FD is at a premium of 1.5% and not 2%. But this loan is personal in nature and you cant claim the interest benefit on this for Income Tax.

You can claim that if you take a normal auto loan with the FD as a surety but in that case the prevailing auto loan interest is charged.

[gkoneti]

After reading all this, i felt we also need to discuss one more point. Opportunity cost of the money that is being invested in FD. Considering the fact that FD rates are going down, it is prudent to buy car with surplus cash and invest the amount equivalent to the EMI in a ELSS (Equity Linked Saving Scheme) or less risker Fixed Maturity Plan (FMP) mutual funds through SIP (Systematic Investment Plan). This way over a period of 3 years, one can earn more money than FD.

Moreover as per RBI act, FD has capital protection of only Rs. 100,000 no matter the amount invested in FD. Incase of a bank going bankrupt, you would get maximum of Rs. 100,000. But all mutual funds and shares are protected by SEBI to their actual cost.

[coolmob]

my dad has been buying cars with this same method for a number of years now. the last car we bought with this was a chevy spark. i dont know the exact details now but i'll post later. one thing is do know is that we finished up the loan in around 1 year or so and didnt have to go through the hassle of getting the hp removed and having to wait for th loan to end even tough we had spare cash at hand.

[Fountainheader]

Update from my side. Got the draft in a day. Loan account has been created with SBI. I just need to transfer money as and when I like.

But indeed it was a great feeling informing the dealer .."No loan, I'll pay the whole amount upfront"

[lambuhere1]

Originally Posted by gkoneti

But all mutual funds and shares are protected by SEBI to their actual cost.

Are you sure about this ? Do you mean the cost at which they were bought ? And do you feel that our good old guardian SEBI will act when MF/Shares collapse ?

More information on the same is required buddy

[gkoneti]

@ Lambuhere1

I mean, actual cost on any particular day or NAV (Net Asset Value).

[amit_mechengg]

now please someone for gods sake explain me this funda. read through all the posts and i am confused. so please can someone work out this scheme for me.

1. i am a salaried person and i am having say 3 lac deposits in Bank X with interest rate 9%
2. I am willing to buy a second hand car of say Rs. 2.5 lacs
3. I am ready to pay 1 lacs in cash and remaining amount i want to finance.
4. i dont want to burden myself with loans on second hand cars which are at about 13-15% interest rates.

what will be the monthly installment? if i go by loan over deposit.

is it a wise decision to keep the deposit and avail loan?

[SAHIR.KITTUR]

Amit, you need just 1.5 lacs. Go ahead and take a loan agnst the fd. Its very simple and fast. Its like taking a personal loan. Its not considered as hypothican of the vehicle. The banks usually charge 2 percent extra. Which will mean that it will be @ 11 percent interest

[NetfreakBombay]

Originally Posted by amit_mechengg

1. i am a salaried person and i am having say 3 lac deposits in Bank X with interest rate 9%
2. I am willing to buy a second hand car of say Rs. 2.5 lacs

Don't even talk about Car to bank. Just ask for "Loan against FD". You can get up to 90% of FD as loan.


Installment would depend in Interest rate.