[KarthikK]

Let me put across this scenario across to those who don't believe in loans: A person with a relatively low income has , say 6L of outright cash lying in an account, and wants to buy a 4L car, say A-star or Alto K10 or something. The person plonks 4-5L on a new car. Next week there is a medical emergency and he suddenly needs 4-5L of hard cash for multiple surgeries/treatments. Lets for a moment assume this aam aadmi doesn't have a cashless medical insurance. What does he do now? Beg around for cash? Sell the depreciated car and look stupid? If he had bought the car on loan, he probably would have invested 1-2L in downpayment and would have more liquid cash for emergencies.

People might say we must never exceed 10% or 20% of salary or whatever. The average salaried employee (probably earns 20-30k a month) will not adhere to these financial gurus' recommendations of investing /saving some fixed percentage, simply because they are 1. ignorant, and 2. have more middle-class ambitions to fulfill (house/car), at the cost of taking a loan. They would prefer to live life now, rather than wait to save up the money. A loan gives them this window to experience these 'luxuries' sooner. Yes, the aam-aadmi knows that x times the EMI is more than the principal borrowed. That is the price he pays for enjoying the car when he couldn't afford it outright.

Not everyone is blessed with 6 figure take-home salaries to be able to save up such huge amounts of money in short time. Not every salaried person would want to wait and buy his dream car when he is an old man. Draining all/most of the liquid cash on a car leaves nothing for emergencies. Most of the salaried professionals keep piling up monthly commitments so they can never have a very big liquid cash reserve anyway. So yes, regardless of all the financial gyaan anyone might give, Auto loans will continue to be one of the main growing sectors for banks in a developing India.

Fear of recession and job cuts? What's the big deal? No one knows what's going to happen tomorrow anyway. Life is so unpredictable, you might be run over by a truck or speeding car while crossing a road the very next day. Do you know what's in store in future? I don't, and I would rather enjoy today (loan) and pay more in interest, than wait and slog for years to try buy the same thing on full cash. That's just me. Even if I lose my job, I still have that liquid cash (which I saved by not plonking on outright purchase) to help me pay my monthly expenses through the difficult period, till I find another job. The next job will continue the EMIs anyway.

Short-sighted view? maybe yeah, but who cares? Have fun while you can , without displeasing anyone.

[rajivr1612]

Originally Posted by carboy

For a personal car, full cash upfront always. If you can't afford it, then you cannot afford a/the car. Buy a cheap second hand car or a bike or whatever. Each month, take the EMI you have saved and invest it (even something as simple as a FD, RD). As and when you have enough money to buy a car, buy it.

My personal opinion(soundly supported by calculations) is that it never makes financial sense to buy anything for personal need on loan other than a house.

I second your views 100%. Even I am servicing a home loan since the last four years. So I had decided that I will buy a car only when I have saved enough. And that's what I did last month when I had booked my Liva GD. I paid the entire amount outright. I didn't want to be burdened by yet another loan and that too for a depreciating asset. So that's why I kept waiting till the time is right. Now I have a sense of satisfaction and the feeling that the car is mine from day one is heartening.

[carboy]

Originally Posted by Warwithwheels

Imagine I have a huge pile of cash reserve at the time of car purchase, say Rs 5 Lacs. I also expect to save about 40,000 every two months over the next few years (which could be used to pay off the Loan against FD, as and when aggregated). I would not buy my vehicle with that cash. I would take a FD for that amount. My FD Will Continue to earn interest right from day one on the total amount (5,00,000) as against my Liability which diminishes with every 40,000 payment I make.

This will make the effective interest cost much lower than my annualized yield on FDR.

Do you have calculations which show that interest cost is lower than FD yield?

These are my calculations.

5 Lakh FD at 9% - At End of 5 years you will have 598206

You take a 2 year loan of 5 lakhs at 11% interest. Your monthly installment is 23,304.

Instead you pay 5 Lakhs outright and put 23,304 in a recurring deposit every month at 9% interest.

At end of 2 years, you have Rs 614460, from the recurring deposit.

614460 > 598206

What calculations do you have which show you come out ahead?

You lend bank money at 9%. Bank lends you money at 11%. It will defy logic and maths if you come out ahead.

Originally Posted by mayankjha1806

If you are a finance wizkid it would not be difficult to comprehend that the asset class that you are considering safe can never beat the inflation.

It won't that's why I some of my money in other investment classes.
However, if you have cash to buy a car, then it doing it is a sure investment as compared to taking a loan for the car and using your money for other investments.

Originally Posted by mayankjha1806

I dont think taking loan and buying car is wrong if one has made healthy financial calculations.

No one says it's wrong.

I have 3 points
1) I won't do it.
2) Don't say it's not living beyond your means. Again, however, I am not saying living beyond your means is wrong.
3) People who say it makes more financial sense to take a loan even if they have cash to pay outright are wrong.

[Warwithwheels]

Originally Posted by carboy

Do you have calculations which show that interest cost is lower than FD yield?

These are my calculations.

5 Lakh FD at 9% - At End of 5 years you will have 598206

Your calculations are flawed. The maturity amount should be somewhere close to 8 Lacs. To make a meaning full comparison, all calculations should be on a similar base.

You lend bank money at 9%. Bank lends you money at 11%. It will defy logic and maths if you come out ahead.

My whole basis of argument is that, I foresee to close the liability much ahead of the FD maturity.

[carboy]

Originally Posted by Warwithwheels

Your calculations are flawed. The maturity amount should be somewhere close to 8 Lacs.

Sorry - calculations weren't wrong - what I wrote in that quote line was wrong. The FD maturity at end of 2 years (not 5) is 598206. FD Maturity is calculated for 2 years and loan is also calculated at 2 years.

Let me put up the calculations here again

5 Lakh FD at 9% - At End of 2 years you will have 598206

You take a 2 year loan of 5 lakhs at 11% interest. Your monthly installment is 23,304.

Instead you pay 5 Lakhs outright and put 23,304 in a recurring deposit every month at 9% interest.

At end of 2 years, you have Rs 614460, from the recurring deposit.

614460 > 598206

Please show your calculations which show you come out ahead? If you think foreclosing early is the thing which makes you come ahead, then include that in your calculations.

Originally Posted by Warwithwheels

My whole basis of argument is that, I foresee to close the liability much ahead of the FD maturity.

Even then you will not come out at ahead. Please show your calculation which shows that you come out ahead if you foreclose earlier than FD maturity.

Also if you have the ability to foreclose early, instead of foreclosing shouldn't you use the money to take another FD rather than paying off the loan as per your logic? Since FD yield is higher than Loan interest.

[mayankjha1806]

Originally Posted by carboy

It won't that's why I some of my money in other investment classes.
However, if you have cash to buy a car, then it doing it is a sure investment as compared to taking a loan for the car and using your money for other investments.

Buying Car is not an investment (I hope we agree here) whether one buys on cash or loan. My calculations are like this

When i bought Baleno i had 6L cash + 1.5L for Down payment. It costed us about 7.XX. We put only 1.5L Downpayment and took loan for the rest of the amount. I invested 6L in my choice of asset class and over 4 years it was ~12L (20%+ CAGR). Thats when the car loan was over and i took a property loan with 12L down payment. I don't think this would have been possible any other way.

Originally Posted by carboy

I have 2 points
1) I won't do it.
2) Don't say it's not living beyond your means. Again, however, I am not saying living beyond your means is wrong.
3) People who say it makes more financial sense to take a loan even if they have cash to pay outright are wrong.

Point one is fine, its your choice, and if it works for you that's fine.
Point 2, it is really not living beyond your means, that the way i see it. We may disagree and move on.
Point 3, it does make more financial sense, only-and-only if one knows and understands how to invest the remaining cash. For someone who does not know or is spend thrift its would be easy to spend that money UN-wisely and then its a real loss.

There is another factor to it, my BIL drives a 2 wheeler and with the way accidents are happening in Bangalore, i think its wise for him to buy a small car on loan. Why? Cos i consider life more important, than any other form of calculation. To start with, he might be putting 5/6K on EMI which is just fine in my view. It brings him safety and security, for which otherwise he might have to wait possibly 5-6 years.

Another reason, people get married, have kids. I see this every day, pregnant mothers driven on two wheelers and it gives me a scare. I keep quiet a distance and do not honk as a seemingly small touch can become fatal for the mother. I advise anyone having kids to get a car first (Be it on loan) as one has to make frequent visits to the doctor, and with the way the traffic in bangalore goes i think its would be a wise move. If we would follow your financial advise, one would have to put off marrying+kids plans for years or be driven unsafely around in bangalore, not to mention the problems one would have with delayed pregnancy.

So, sorry, but i do not see any sense in such financial advise. Although i respect it, envy the lucky soles who are able to follow, and wish it was easier for everyone to follow, but under the given circumstances i do not think that is possible,

[carboy]

Originally Posted by mayankjha1806

Buying Car is not an investment (I hope we agree here) whether one buys on cash or loan.

Absolutely. Let me rewrite what I wrote - "However, if you have cash to buy a car, then it doing it is a sure investment as compared to taking a loan for the car and using your money for other investments." I am not saying that buying a car is an investment.

Originally Posted by mayankjha1806

When i bought Baleno i had 6L cash + 1.5L for Down payment. It costed us about 7.XX. We put only 1.5L Downpayment and took loan for the rest of the amount. I invested 6L in my choice of asset class and over 4 years it was ~12L (20%+ CAGR). Thats when the car loan was over and i took a property loan with 12L down payment. I don't think this would have been possible any other way.

There are people who took out a loan from a moneylender at 40% interest rate & were able to make 50% return on the money on a particular investment. But that doesn't mean it makes financial sense to do so.

Originally Posted by mayankjha1806

I advise anyone having kids to get a car first (Be it on loan)

Wow. Car manufacturers would be jumping with joy. Few crore cars would be getting sold every year. Other than people buying 2nd, 3rd cars or selling older cars and buying new ones.

[abeerbagul]

Simple rule: Any depreciating asset must be bought for cash. If you cant afford to buy the car you want cash down, you cant afford to buy it on loan.

If you are trying to "stretch" your budget with a car EMI, that is a sure way increase tension.

E.g. I can afford the 5 year EMI of a 15L civic with 20% down, approx 25k, but surely will hesitate to buy it outright at 15L.
In that case, this is a warning signal that I am buying something that I cant afford.

An interesting case is if you have 100% downpayment for a car, and need to decide whether to take a loan instead. In that case, I guess a loan is more sensible only if you can invest the lumpsum at a rate > car loan interest. Definitely not putting it in an FD at 9% and taking a loan against it at 11%. This is like paying the bank 2% for loaning you your own money.

[asitkde]

A vast majority of new car buyers in India buys cars in the range 3L to 8L OTR or thereabout. Now, from this group, how many do you think have disposable savings so that they can buy the new car by putting down hard cash for the entire amount? I'd reckon very few, if none.

What are the options then? Buy used, or partial loan for a new car. The used car market is still tricky in India, one really needs to be careful. But if care is taken, this is a safe and good option for the buyer. But this takes us back to the pre-Maruti era, where only a select few could buy cars. This suits a closed economy as we had before 1991. Buying used does not do anything to stimulate the economy of the country. I know this is not a economics forum, neither am I an economist. But all would agree to a man that the average middle-class salaried Indian has now more buying power than 20 years ago. And this has come about by measures that enabled sale of new cars.

For the salaried person, income per month is fixed, it's only going to go up with time by yearly raise, promotions, new pay commission implementations etc. The fixed EMI becomes that much easier with every passing year.

The only problem in India as I see it (in comparison to the developed countries), the interest rates are ridiculously high. I have not understood why the rates have not come down significantly. With growth, the rates should have come down.

Any way, my point is, without volume sales of new cars and other consumables, I do not think the middle-class of India would live to enjoy some of the economic benefits as they are today.

[Ahmed]

There is one example. Me and my friend both had taken a loan of 5L. He purchased a flat for 7L in 2005 in Jaipur and I purchased a Baleno VXi for the same amount in the same financial year. Now in 2008, I threw a party that I was free from the EMI. My friend came over and he said that he had a few more months to go. In 2009 I sold my Baleno for 2.25L added another 2L took another loan for the same amount and purchased a Safari. Called up my friend and told him.. he tells me that he had sold the flat for 39L, Paid off all his credit cards, paid off the EMI, Purchased another bigger flat (on EMI) and a brand new Fiesta TDCi on cash. Left over amount was used to get married followed by a honeymoon abroad !

Moral of the story - get into EMI business for something that appreciates in terms of value and for everything else purchasing things outright makes sense always.

I have been following a 60:40 rule - 40% goes into savings and 60 is used from the salary. Invest 40% in SIP/MF/RD you decide. Think for a vehicle first and then take out the investments when you have grown to that amount. Remember that the 40% is growing every month as well.

Think of this - save the amount in your bank account and it will fetch you an average 4% interest. Purchase the vehicle outright. Keep saving the EMI for the next venture. I purchased a TATA Sumo on the same formula.

Now that I am a businessman and wanted a new vehicle and saved around 25L. My accountant never wanted me to purchase a Fortuner outright, he made me pay 11L down payment, rest a loan, and the remaining amount from the savings a plot was purchased. I am not an accountant lingo and principle geek - all I understand is that as long as you are not in an EMI you a free soul.

It is also true that you as a person are the best to decide the best option for you. And you alone are to be blamed for any mishap.

[abeerbagul]

Originally Posted by mayankjha1806

When i bought Baleno i had 6L cash + 1.5L for Down payment. It costed us about 7.XX. We put only 1.5L Downpayment and took loan for the rest of the amount. I invested 6L in my choice of asset class and over 4 years it was ~12L (20%+ CAGR). Thats when the car loan was over and i took a property loan with 12L down payment. I don't think this would have been possible any other way.

What you are mentioning is a return of 19% CAGR on your 6L. This is amazing! And definitely not an assured return. In fact, I can confidently assume that this is possible only in stocks or mutual funds, and both do not give guaranteed returns.

[carboy]

Originally Posted by asitkde

The only problem in India as I see it (in comparison to the developed countries), the interest rates are ridiculously high. I have not understood why the rates have not come down significantly. With growth, the rates should have come down.

Interest rates are more coupled with inflation rates, and not growth rates. Check Inflation Rates in the developed countries you are talking about.

[mayankjha1806]

Originally Posted by carboy

There are people who took out a loan from a moneylender at 40% interest rate & were able to make 50% return on the money on a particular investment. But that doesn't mean it makes financial sense to do so.

You are making it sound like it happened by fluke, i disagree. Even if the markets had crashed i would not have lost any money. Only the returns have not had been fancier, and even this time my returns are 16%+ CAGR so it all depends on how good is your research.

Originally Posted by abeerbagul

What you are mentioning is a return of 19% CAGR on your 6L. This is amazing! And definitely not an assured return. In fact, I can confidently assume that this is possible only in stocks or mutual funds, and both do not give guaranteed returns.

Unless you believe in Mayan Calendar, and the world ending. The fundamentals of economy will not change, and if invested wisely with knowledge and research it is not rocket science to generate 15% returns. BTW there were no stocks, and i have done this over last close to two decades of investing, so please do not call it fluke.

[redeff]

Speaking purely from a Tax point of view, for a businessman or a professional the hit of a loan is somewhat lessened as both depreciation can be claimed on the car's value as well as the interest amount can be claimed as a business expenditure. However in case of a salaried person, this makes a lot less sense.

[carboy]

Originally Posted by mayankjha1806

You are making it sound like it happened by fluke, i disagree. Even if the markets had crashed i would not have lost any money. Only the returns have not had been fancier, and even this time my returns are 16%+ CAGR so it all depends on how good is your research.

HDFC Top 200 fund has shown 8.3% returns in the last 3 years. It's supposed to be managed by some of the top professionals in India. They are probably not into good research.

Read this essay by Warren Buffett.
http://www.tilsonfunds.com/superinvestors.html

I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.

By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, " If it can't be done, why are there 215 of us?"