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Old 22nd December 2010, 22:39   #16
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

Nice thread.

My views on deciding between Loan v/s Cash down.

Now this depends the overall financial situation of the individual. If someone has:

1. Adequate cash (debt portion of portfolio) for use in exigencies - Also known as debt cushion. Can be in the form of liquid funds/FDs/savings account. Typically 5-6 Times the monthly income.

2. The right amount being invested regularly for Goal based investments such as buying a house, marriage, child's education etc and this investment amount will not need to be cut down.

3. Right mix of asset allocation, as per the risk profile of the individual.

Now if you fulfill all above conditions and still have adequate spare cash - No better option that Cash payment. You should use your spare cash (not including the debt cushion) for the downpayment.


Otherwise Loan is the only option but in that too make sure you are not servicing more than 40% if your take home salary in EMIs (all loans included) and all goal based investments continue without being reduced. Delay your purchase until you are able to bump up your down payment so that EMI is in the affordable (< 40% range).

Last edited by DCEite : 22nd December 2010 at 22:56.
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Old 23rd December 2010, 21:11   #17
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

When we were buying a new car in 2008
I too thought of buying against od of fixed deposit.
When a friend in the banking industry. A senior with loads of experience advised me no too. He said why do you want to work for the bank.
Firstly you will not be earning any interest on your fixed deposit as you will be using the interest earned to repay the bank. Plus 2% additional from your heard earned money.
So i broke our fd and went out and bought the car of my dreams.
What i do now is think in my mind that i have to repay a loan and set aside money. And started building my fd back.

Why i like this option best is.

You dont have to worry abt emi
You have flexibility just like repaying an od. But nobody is charging you 2%

so the bottom line is when you give your fixed deposit for od. It does not earn anything for you.

So i felt it better to just break it. And set money aside for building new fixed deposits.

Wishing you luck with your new purchase.

And hey any option you choose.

In the end theres nothing like getting behind the wheel with a huge grin plastered all over your face.

Regards

mash
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Old 23rd December 2010, 23:33   #18
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

if the best return you can manage on your excess cash is the 6% returns on FD, then buying with cash is undoubtedly the best option. If you know how to get higher returns with very little risk, then option 3 is the best.

Financially, option 2 is the weakest, though it might result in fewer hassles. Because, you will unnecessarily end up paying 1-2% extra for no reasons.
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Old 24th December 2010, 00:56   #19
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

Quote:
Originally Posted by Minardi View Post
if the best return you can manage on your excess cash is the 6% returns on FD, then buying with cash is undoubtedly the best option. If you know how to get higher returns with very little risk, then option 3 is the best.

Financially, option 2 is the weakest, though it might result in fewer hassles. Because, you will unnecessarily end up paying 1-2% extra for no reasons.
+1 to that

With all due respect to all contributors, I cannot see any value in option 2 for such a long term expense (3 years or more)

If I have a sudden need for liquid cash due to an emergency then OD against FD works quite well. I can get the cash without much hassle and then repay it over the next 2-6 months at my leisure without a major hit. All I pay for this facility is 1 or 2% of the total amount I withdrew, which is an okay price to pay. Of course I also lost the entire interest of the FD for that period but if it was a long term FD locked at a high rate, then I still enjoy the higher rate for the rest of the days. Breaking the FD to pay for the emergency would have resulted in a lower rate too.

However, for buying a car, unless you also have the option of leasing it from your company, I fail to see the benefit in going for OD against FD as compared to cash down.

The idea behind considering other options besides cash down is to find ways of avoiding having to pay the entire amount at lump sum and incur the 'opportunity cost' of investing that amount in some other high-yielding avenue. But if you go for OD against FD, the money in the FD is locked until you have paid off the entire loan amount.

Hence you have locked the money for 3 years (or more, depending on how long you take to repay the loan), incurred the 'opportunity cost' of not being able to invest it elsewhere and ALSO paid the additional 1 or 2% interest for this 'facility'. Where is the benefit????

Or I am missing something which is too obvious
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Old 24th December 2010, 09:59   #20
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

I always advocate that people should take a bank loan especially for a car which is one of the fastest depriciating asset even if you can afford to put in all cash (I am talking from the perspective of legitimate cash)

Reason is max you will end up paying is an interest of 11-12 % on your loan. Even if you put this money in any of the standard mutual funds (which has been my experience over 10 years of investing) is that you can definitely get more ROI. Instead use this cash for building real assets like property or any other investments which will actually appreciate over a period of time.
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Old 24th December 2010, 11:20   #21
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

@indiagenie, beautifully explained!

@Palio_2005, I agree with you, but the point is most people do not invest in MFs, but in FDs. Also, you said 'use this cash for building real assets like property'. Isn't interest on property loans lower than on car loans? In which case it males more sense to use the cash for car and a loan for property.
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Old 24th December 2010, 12:33   #22
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

I would normally go with the option of complete cash down payment.
However, if this is an issue (personal/ family/ taxation?), then I would go for a mix of two options. So if the car costs 10L, I would pay as much cash down payment as I am comfortable with (say 7L) and then either take and OD or loan for the balance (3L)
In the end, I dont want to be saddled with another loan.
However, some people do take loans for insurance purposes. In my case, I have taken a higher home loan than I needed. This:
1. frees up my savings for buying a car of my choice,
2. gives me tax benefits on the home loan part
3. increases insurance coverage as I have an insurance against my home loan amount
If you want to take a home loan, I would recommend to do that first as you will have better eligibility to buy with your deposits etc. once that is done you can fit in other liabilities/ loans as you choose
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Old 24th December 2010, 13:43   #23
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

Well! It all depends on ones networth, If someone has surplus cash in terms of Profits from MFs or Matured FDs then it makes sense to buy the car in all cash. A home loan always has attractive interest rates than a car loan and also it saves tax. At the same time any real estate or house is a appreciating investment while a car is a depreciating investment from the day one. So practically if you see the net outgo (total cost of ownership) should be considered here and that too solely for the purpose of commuting.

Lets Look at an example, few assumptions:
Lets say you want to buy a car with an on road price of 6L and assuming after using it for 5 years Resale value is half at 3L.
Assuming insurance cost, fuel costs would be the same irrespective of the options below so not considering them for simplicity.
An OD loan interest rate usually is 2.5% more than your FD rate that you are earning.And you get an OD of upto 90% of your existing FD.But during the tenure of OD loan you cannot use the FD for any emergency.Thou it earns interest you have to keep it aside untill you finish your OD loan in 5 years.


Scenario 1
6L Cash payment and use the car for 5 years Net paid = 3L (after deducting 3L resale), ofcourse cash is king.

Scenario 2
6L loan for 5 Years at 10.5% Interest EMI of 12,896, total paid in 5 years Rs.7,73,780 Net paid = 4,73,780 (after deducting 3L resale)

Scenario 3 using a OD of 6L at 9% interest against an existing FD of 6.75L earning 6.5% for 5 Yrs

For the 6L OD Loan for 5 years at 9% Interest EMI of 12,455,total paid in 5 years Rs.7,47,301 Net paid = 4,47,301 (after deducting 3L resale)


Now lets explore scenario 3 further after 5 yrs you FD is intact and is worth 9,24,808.5 and you might have earned an interest of 2,49,808.5. So effectively after 5 years you still have 9.24L Plus 3L from your resale proceeds i.e 12.24L


Scenario 4
But had you broken your FD and paid 6L for the car and left the 75k untouched in FD still at 6.5% for 5 years and built a corpus from the amount for EMIs you would have otherwise paid, lets see how it pans out.

75K in FD at 6.5% for 5 Yrs = 1,02,756.5

And if you invest by SIP 12,455(EMI amount) in any instrument (could be MFs,RD,FD post office etc.) earning atleast minimum of 6.5% then you accumulate 8,80,245 at the end of 5 years.So total of 1,02,756.5 + 8,80,245 = 9,83,001.5. Now add the resale proceeds of 3L then it becomes 12.83L. And this way you can always use the corpus for any emergencies in these 5 yrs if a need ever arises. And there is never a liability at any point here, but for a loan there always is.

Note: This is my Understanding of the OD loan concept, but I am not sure if I am entirely right, Lets say if one has FD of 3L and one can get a OD loan of 6L at 2% less interest than a normal car loan interest rate using those FDs.This kind of scenario could tilt advantage towards the OD loan again.But I am not sure if the FD would still earn the interest.
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Old 24th December 2010, 15:02   #24
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

NFS - From your writing I realise you are a salaried person. So for you the best option is Cash payment. Both Loan and OD are not in your favour. In your calculation on page 1 you have shown 10L at 8% simple interest yeilding 2.4L and with 72K tax paid out you would get an interest of 1.68L but while calculating EMIs paid you have not considered time value of EMIs. What I mean here is you have paid 31 odd K first month itself hence the principal amount on the car loan reduced below 10L in the first month itself. Hence interest paid on servicing a car loan will be much higher than the FD interest you gain (Simple logic being Banks always profit and hence can't give you(Lender - on FD) more money than they get from the borrowers(When you borrow a loan or OD)).

Even while taking OD on a FD one has to pay >30% tax on interest earned by the FD. This reduces further the attractiveness of OD.

If you are a person who owns his own business then the equation is totally different. Loans benefit them. As a matter of fact There are hardly any business man in India who genuinely pays all tax he owes to the government. Most of them find ways and means to beat the system (I know here I am treading in a snake pit full of Cobras ).

Last edited by DieselFan : 24th December 2010 at 15:04.
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Old 24th December 2010, 15:42   #25
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Default Re: Buying Scorpio - What payment options? Cash/OD on FD/Loan

Quote:
Originally Posted by NFS View Post
@dieselfan & @mmxylorider: Thanks for your responses. To my understanding here is what the calculation looks like:

For example:
Pricipal (borrowed money): 10,00,000 (10 lakhs)
Rate of interest: 9% per annum
Tenure (loan duration): 36months
Monthly payments (EMI): 31,799.00 (extracted from online EMI calculators)


At the end of 36months one would have paid
36 x 31,799.00 = 11,44,764 (extra of 1,44,764 above what was borrowed)

Say an FD of 36months of 10,00,000 @ 8%

2,40,000 Interest received at the end of 3rd year on Simple interest calculation

30% of 2.4 lacs as tax = 72,000 paid to the IT man

which is 2.4lacs - 72,000 = 1.68lacs

Do you think we have greater savings with going for Loans?

Of course the additional effort on registration clearance and selling when loan is active are noted
Your calculations are correct, but not relevant.

In the case where you pay cash down, you have an additional Rs. 31,799.00 per month which you can put into another investment instrument. At the end of 3 years

So what you need to calculate is this.
1) Cash Option.
You are putting 31,799.00 in a recurring deposit at 8% compounded monthly.

Now at the end of 3 years you have a Car + Rs. 13,00,000

2) Loan Option
Take loan at 9% & put 10 Lakh in FD at 8%

At the end of 3 years you have a car + Rs 12,70,000.

I have ignored tax in both cases for ease of calculation.
Also I think car loans isn't available as cheap as 9% - or is it?
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Old 24th December 2010, 21:11   #26
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

My replies in bold

Quote:
Originally Posted by samsan02 View Post
.......

Scenario 1
6L Cash payment and use the car for 5 years Net paid = 3L (after deducting 3L resale), ofcourse cash is king.

No EMI liability for 5 years but your emegency fund is fully gone in purchasing the car.

Net balance after 5 years is 3 lacs

Scenario 2
6L loan for 5 Years at 10.5% Interest EMI of 12,896, total paid in 5 years Rs.7,73,780 Net paid = 4,73,780 (after deducting 3L resale)

You have 6 lacs to meet any emergency! If you put this Amount in an FD @ 8%, then by simple interest calculations:
6 Lacs after 5 years become 8.40 Lacs
Net balance after 5 years is 8,40000 - 473780 = Rs.3,66,220
So, if one is buying a new car, it is always better to go infor a loan & invest the available funds in FD / MF / Stocks
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Old 24th December 2010, 22:11   #27
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

Quote:
Originally Posted by breezydrive View Post


So, if one is buying a new car, it is always better to go infor a loan & invest the available funds in FD / MF / Stocks
Assume I am running a bank - do you think it's better for me to make money by giving out loans or by investing the money in FD/MF/Stocks?
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Old 24th December 2010, 22:46   #28
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

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Originally Posted by carboy View Post
Assume I am running a bank - do you think it's better for me to make money by giving out loans or by investing the money in FD/MF/Stocks?
OK, I am assuming now that you are running a bank, but firstly in that case you don't want to buy a car (because you already have one) and certainly don't need a loan for that

sorry, couldn't help cracking this PJ.
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Old 24th December 2010, 22:48   #29
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

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Originally Posted by RemingtonSteele View Post
OK, I am assuming now that you are running a bank, but firstly in that case you don't want to buy a car (because you already have one) and certainly don't need a loan for that

sorry, couldn't help cracking this PJ.
I am sorry, I didn't get the joke - I didn't say anything about taking loans. I was asking about giving out loans. Nor did I say I want to buy a car.
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Old 24th December 2010, 22:57   #30
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Default Re: Buying a car - What payment options? Cash, OD on FD or Loan?

Quote:
Originally Posted by carboy View Post
I am sorry, I didn't get the joke - I didn't say anything about taking loans. I was asking about giving out loans. Nor did I say I want to buy a car.
Mate, don't think so much it was just a PJ. The context was you posted...
Quote:
Originally Posted by carboy View Post
Assume I am running a bank - do you think it's better for me to make money by giving out loans or by investing the money in FD/MF/Stocks?
in the discussion thread "Buying a car - What payment options? Cash, OD on FD or Loan? " so I got a chance to crack a PJ.
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