[smokie]

The maths used on this thread hurts!!!

Why are people even arguing that borrowing from bank (loan) and lending to bank again (FD), we can somehow magically make profit. That's all what banks do!!!

They borrow money from us (savings, FD) and lend it to others (loans) and they make a profit. Plot the cash flows in excel for both options, use NPV and PMT formulas and see for yourself.

NPV of the loan route will always be worse than cash purchase. There are other reasons to take a loan, such as liquidity requirements, etc. but saving money will never be one of them.

[F1amit]

I still fail to understand how investing in FD (inflow @ approx 8.25 / 8.5%) and taking car loan (out flow @ approx 10.25%) over outright purchase has more benefit?

Practically thinking, I still believe borrowing money would always be costly affair than lending money (with investments with guaranteed returns)

[9thsphinx]

Here's my calculation (I'd like to call it the 50-50 method) and why I would prefer taking a loan as opposed to paying for the car outright!

Say you have an income of 50k and you're in the market for a 6-7L hatchback. How I would do it is, pay 50% of the money as down payment (if you have the means). That way, you're already half way there. The EMIs for a 3 year loan would come to approx 9-10k as per current interest rates. Now, I would setup automatic deductions from my bank account which would go towards the EMI. How I would take it is, instead of 50k I am making 41k and just ignore the 9k going towards the EMI. Also, I am currently driving the new car which will very shortly in a 3 year span be under my personal name. At the end of the 3rd year, once the loan has been *automatically* paid off and the car is transferred to my name, I have a choice to either keep the car, sell the car or buy a new car using the same 50-50 method!

This process takes into calculation external factors like changing rates of interest, job stability, loan tenure, and peace of mind. I personally find it a best compromise between both the worlds. But then again, to each his own!

[carboy]

Originally Posted by smokie

The maths used on this thread hurts!!!

Yes, it does - I am no longer going to reply to any more of the fuzzy math examples any more. Every page of this thread there is a new person who starts with "let me present my view here" and then proceeds to make a cool profit out of taking a loan at a higher interest rate and lending it back at a lower interest rate.

Originally Posted by smokie

Why are people even arguing that borrowing from bank (loan) and lending to bank again (FD), we can somehow magically make profit. That's all what banks do!!!

They borrow money from us (savings, FD) and lend it to others (loans) and they make a profit.

Apparently the magic of reducing balance and compounding returns conjures profits out of thin air for the guy who takes loans.

[abeerbagul]

Reducing balance is just a way of saying that compound interest will apply on a reduced amount of principal, coz you are paying down principal every month.

The true way to compare would be:
Take a loan at 10.5% from bank, promise to repay in lumpsum at the end of 5 years.
Now put the same money in FD for 5 years at 8.75%. At the end of 5 years, which is the larger amount, loan repayment or FD maturity?

Just the fact that you are reducing the principal owed to bank every month does not obscure the fact that you are paying 10.5% to bank and bank is paying you 8.75%.

[Pancham]

Right before this thread gets closed I have a query. I am very curious TB. How did you arrive to 7.25%. Can you please show the calculations.

Originally Posted by TaureanBull

(a) The loan rate is on reducing EMI. The individual is not paying interest on the entire sum of 3 Lakhs for 5 years rather on the reducing principal amount. The loan rate of 12% is known as nominal interest rate. The effective rate of interest will come out to about 7.25%.

[alpha1]

Originally Posted by Prodigyy

Reducing balance is actually true and the effective interest rate comes out to be lower than what is quoted.

For example, if someone takes a loan at 12% on reducing balance of Rs. 300000, then the EMI calculated comes out to be Rs. 6673.33 (calculated from SBI EMI calculator). Considering Rs. 6674 for 60 months total amount paid is Rs. 400440 thus the total interest amounts to Rs. 100440.

100440 interest on a loan of Rs. 300000 calculates to a total interest of 33.48% over a period of 5 years. Effective Interest rate can easily be calculated with this.

Though, all said, most banks even though they do lend on reducing balance, but many banks charge a whole lot of OTHER charges which are not charged by Public Sector banks.

1. Loan amount = 3 lacs
2. Interest rate = 1% per month
3. Period of loan = 60 months
4. EMI = 6673 per month
5. Total interest you paid = 100440

All fine till now. Verified the same using excel.
Please note that the interest rate (1% per month) is ALWAYS applicable on the balance amount left. That is how we arrive at 6673 EMI.

First misleading statement by Bank is to label 1% per month as 12% per annum. It is not.
1% per month is actually = 12.68% per annum.

Second misleading statement by bank = reducing balance.
Interest of 12.68% per annum or 1% per month is always applicable on the balance - not on the principle.

If any bank does the following:
1. Loan = 3 lacs
2. Period = 5 years
3. Interest = 12% per year
4. Future value = 3*(1+12%)^5 = 5.29 lacs
5. Hence EMI = 5.29 lacs / 60 month = 8811
It is PLAIN WRONG.




Now why you are calculating the "effective interest rate" by diving 100440 by 3 lacs?
You are not calculating the interest rate by doing this - you are calculating the net returns on investment.

Tomorrow if the loan period changes (from 5 years to 10 years), your "effective interest rate" calculation will yield a different result. BUT the bank is still charging 1% interest per month only. Try doing it.
The "cost" of money is what the bank is charging us as interest. This remains fixed.

Second, even if you do wish to calculate the net rate of returns, please keep in mind the time value of money.
Each year you have to factor in a discounting factor of 12%.
1 lacs today = 1.12 lacs one years hence.
Or in other words 1.12 lacs one year from now, is actually worth only 1 lac today!

Your calculation of 60*6673 does not factor this important thing!

[freak1201]

Originally Posted by carboy

Yes, it does - I am no longer going to reply to any more of the fuzzy math examples any more. Every page of this thread there is a new person who starts with "let me present my view here" and then proceeds to make a cool profit out of taking a loan at a higher interest rate and lending it back at a lower interest rate.



Apparently the magic of reducing balance and compounding returns conjures profits out of thin air for the guy who takes loans.

End of the day it all boils down to wether i wish to fulfill my dreams on my own money or on borrowed money!

[dhawald3]

Originally Posted by freak1201

End of the day it all boils down to wether i wish to fulfill my dreams on my own money or on borrowed money!

I voted for paying outright.

After getting employed I got my first car( new Wagon R CNG) on Loan in Delhi, and I have to pay an EMI monthly about 10k for total 4 Years.

The on road price was approx 4.5 and I would have to pay approx 5.5 over 4 years due to the loan.
Now I got transferred to Bangalore within months of buying the car, as my Parents stay in Delhi I did not bring my car to Bangalore with me.

Since I had decided to settle in Bangalore I needed a vehicle here, as I got pickup and drop from the office the problem of commuting daily to office was not there, I thought of buying a 2 wheeler but my father was against me buying a 2 wheeler.

I did not want to go for another loan on car as more loans will limit my ability to get a bank loan for property etc.

So it was decided to buy the TATA Nano without taking loan. So I saved around 30k per month for 6 months and got some additional funds from my father, and in Nov got the Special edition Tata Nano LX.

I am very happy with the car, breeze to drive it around congested roads of Bangalore.

Also it is a great relief to know that nothing will be deducted from my bank account every month for this car as opposed to bank taking away 10k every month for my Wagon-R in Delhi.

I wish that instead of taking Wagon -R on loan I could have gone for Alto as my first car and be happier.

Now I have about 3 recurring deposits worth 9k every month that will give me lump sum amount in the near future.

"The want to have a bigger costlier car comes from ego, not from need."

[latentpotential]

As an update, being the OP myself. Latest Purchase, again full cheque payment. No Loan please.

Of course, if the new budget permits any tax breaks for buying a new car, wishes could be horses and beggars would ride (James Kelly).

[arnabchak]

The financial crunch always remains and no matter how much you earn and the amunt of increments you get, you still are short starved for cash.

Even if you are a Executive or a General Manager in a company, the expenses or rather cash outgo is proportional to your salary increment.

In such a case, which I am sure will be the scenario in most middle class and upper middle class families, does this mean that you cannot afford a car or deserve it?

All gyan on reinvesting comes true when you actually have that money to reinvest!!

So in this scenario, no two ways but loan is the only option and the logical option.

You know your monthly payout and you can likewise allocate your funds towards investments/liabilities.
Also, you have the pre payment facility and if you ever have any surplus, you can always pre-close the loan after 12 months.

[bluevolt]

Bumping up an old thread because I am in market to buy a new car and confused between taking a loan versus buying it outright. I have budget to buy it outright but was considering taking a loan as well.

The figures with respect to interest rates etc in this thread are quite old and current rates have changed quite a bit both for FDs and car loans (8.5% is the lowest I have heard of). I see many mixed opinions and no clear answer to which people have agreed to from previous discussions.

Can any expert present a logical and correct answer on what is the right approach for a person having liquidity to buy a car outright but also considering the option of taking a loan.

[FrodoOfTheShire]

Voted for Outright!

Originally Posted by bluevolt

Bumping up an old thread because I am in market to buy a new car and confused between taking a loan versus buying it outright. I have budget to buy it outright but was considering taking a loan as well.

IMO, if the money you have now was saved for the purpose of buying this car, then I suggest you buy outright.

As a general rule, I avoid loans and credit cards like a plague. They're the bane of today's generation. I am 32 years old and bought my first car last year. I had saved/invested into a car fund 6-7 years prior to that which I used to pay for the car outright. I believe in living debt free. Banks and credit card companies are here to make a profit, so there's no way a person would gain anything from them, other than the convenience of buying something now with money they don't have.

A banker friend of mine was aghast when I bought the car outright. He started telling me all the calculations how I could've invested that money elsewhere gaining more interest, but that "elsewhere" is almost always the equity market which can give a modest return of more than 10% but again that's never guaranteed. So if you have the money specifically for buying the car, buy outright, be debt-free, move around proudly with car bought from your own money.

[shankar.balan]

If buying brand new, then buy on loan. Makes sense especially when buying into an expensive segment of vehicle.
If buying used then buy with savings.
If you cannot afford the segment or level of car that you are aspiring towards; affordability means thinking also in terms of its routine annual maintenance and upkeep and if you have concerns about part costs etc, then that is clearly NOT the car for you.
Better to set your sights at the level which you are confident of achieving rather than kill yourself stretching too far for something which is unattainable at present.

[blackwasp]

Originally Posted by bluevolt

Bumping up an old thread because I am in market to buy a new car and confused between taking a loan versus buying it outright. I have budget to buy it outright but was considering taking a loan as well.

Get SBI car loan with overdraft facility. One approved, plonk the cash you have in that account and set up auto debit from that account for EMI repayment. You will end with a 0% interest loan essentially but with the safety that if you need the money for some urgent need, you would be able to take it out.

Can any expert present a logical and correct answer on what is the right approach for a person having liquidity to buy a car outright but also considering the option of taking a loan.

I'm not an expert, but some considerations that might need liquidity of money:
1. Aged family members
2. No mediclaim policy to cover unexpected illness / accident
3. No full insurance coverage of car (eg. my Palio only has a 3rd party cover), or cost to get alternate car if your current one meets with with some unforeseen damage / fault
4. Chances of home renovations etc which might arise etc.

At the end of the day, you need to see what you are comfortable with and if you have covered all your bases.