[gops2009]

This thread makes for some interesting reading, however, I have had this debate in different circles and the views have not been very different.

IMHO, each of the people are right in their own context. For me , I find it very difficult to measure everything in strict financial sense, because an excel spread sheet cannot measure the joy and pride of owning a car of your choice nor can it measure the convenience of owning one when you want one. As far as I'm concerned, I believe , we live only once and money was invented to buy security and comfort. If you are confident you can handle it even if you take a loan go for it!!, if you think it will be a discomforting feeling that you carry when in debt, then go with what would keep you in peace.
There is a price we pay for affording a convenience today that we could not afford without the help from a financial institution and that we call interest and all of us or atleast most of us have a certain value we think is fair to pay to achive a dream , this should decide the tenure and quantum of loan. My two cents

[amitg79]

If you have a choice, then it is always better to buy the car with cash up front. Why keep your money aside and pay over 12% interest on the car loan?

But what about people who do not have the cash to buy the car outright? They would need to wait for an awfully long time to save money for a full down-payment. In such cases, loan is the only option. Even if it is costly in the long run, you can buy that car you want now.

Which brings me to another question: In case of companies offering cheap finance (VW has some offers @ 5.99%), would it actually be more economical to take the finance option and invest your capital in instruments that will earn > 6% interest?

[carboy]

Originally Posted by amitg79

Which brings me to another question: In case of companies offering cheap finance (VW has some offers @ 5.99%), would it actually be more economical to take the finance option and invest your capital in instruments that will earn > 6% interest?

How does the company offer loans at such a cheap rate - I am assuming company is absorbing part of the costs of the loan. In which case it's part of cost to the company. Which in turn means it is already built into the selling price*. Which in turn means - you may be able to negotiate with them - i.e. they are offering the car @ 6 Lakhs with 5.99% loan - they may be willing to offer the car @ 5.9 Lakhs if you pay outright (or take your own loan). In which case - you have to do a comparison after also taking into account the discount - while figuring out if it would be more economical to take the finance option and invest your capital in something which earns > 6%.

* - one thing is which is written in stone is that there is no such thing as a free lunch!!!

[noopster]

NPV calculations and opportunity cost considerations aside, I have to go with what matters to me most personally- peace of mind- and vote for outright purchase.

A car is a depreciating asset and I always like the thought that in case I need the liquidity or find no more use for my car, I can sell it off quickly rather than worry about hypotecation reversal etc. Besides I am uncomfortable being in debt since I have seen a lot of my friends who spend 80% of their incomes before it even hits their account and that is NOT how I want to live my life.

A reasonable home loan with EMIs is okay for me, any loans or liabilities beyond that make me uncomfortable. My credit card bills typicaly get paid before the bill is even generated! It's completely a personal preference, not backed by any logic or calculations, so please don't treat it as advice!

[Jignesh]

Hello,

Very interesting thread & equally thought provoking sugggestions by everyone.

I feel the decision for buying a Car in our country can be divided as for luxury & genuine need.

Now, when it comes to Car purchase as a luxury (or just as a additional comfort for family) then it should be purchased with outright cash. There is no point in taking loans for luxuries of life & then keep on paying interest in these loans. Also there are many calculators available which prove that if your running is less than 4000 / 5000 kms a year, travelling by pre-paid Taxi is better & cheaper option.

When the Car purchase is done out of genuine need for daily office / business commute, then it is a matter of personal choice & decision. Frankly speaking I have never taken a loan for anything & will never advise taking a loan for Car. As I feel Car is not a asset (even if it is a asset, its value is reducing every passing day), thus I shall not recommend to take a loan for buy a Car.

Thanks,

[shankar.balan]

Originally Posted by noopster

My credit card bills typicaly get paid before the bill is even generated! It's completely a personal preference, not backed by any logic or calculations, so please don't treat it as advice!

This part I completely agree with. Credit Card debt is the most expensive debt possible unless of course one goes to moneylenders and other evil usurious creatures of that sort.

I also dont like carrying over Credit Card expenses because it is not a good thing to do at all! As a mere "transactor" and not a "revolver" the bank credit cards people do not like me at all one bit because I don't afford them a chance to earn interest from my over-expenditure...

With ref to a car being a luxury - I would say here that it is today more of a necessity in India, especially in the absence of an acceptable, safe, timely public transportation system, especially out there in the 'burbs..more particularly my concern right now is in the area of the lack of "last mile connectivity" or even a safe and secure "park and ride" option!

[Zenster]

This is my philosophy and may or may not be considered as an advice (depending of the reader mindset).

I believe in "Not living like a King on borrowed Treasure", and I try to follow this for credit cards and loans. And so far I have not repented or thought otherwise. This method just takes longer to get what I want, but also makes me work and save harder to get it. So, when I finally get it, it SWEET!

Like I said, this may sound foolish philisophy to some but it works for me. So for me its 'Upfront' all the way.

All the Best!

[RVD]

Originally Posted by carboy

1) Option 1: You have 4,90,000 but still decide to take a loan. You decide to put the 4,90,000 in a FD earning 7%

You have paid 15676 per month for 3 years.

At the end of 3 years you have Rs. 5,99,871

2) Option 2: You have used the 4,90,000 to buy a car outright. You have no FD.
But every month you put 15,676 into a Recurring deposit earning 7%. You do this for 3 years.
Your maturity amount will be Rs. 6,29,206

6,29,206 > 5,99,871

So loan is more expensive.


That aside, I don't see why anyone needs an example to show this.
You lend bank money at x%.
Bank lends you money at y%.
y > x
How the hell can anyone think that you are going to come out ahead?

Lets try this again using today's rates. One thing that one must remember is that while you take a loan, the option is pretty much limited to banks whereas when you loan out, there are a few more options available at your disposal.

Lets assume the following scenario:
a) A person has 4,90,000/- in cash and looking to buy a car.
b) He is ready for a MOM outflow of 15,676/-
c) Tenure is 3 years

Option 1 :
He invests 4,90,000/- lump sum in a company FD for assured returns(one must be prudent in selecting the company but it is a relatively safe investment). He pays his EMI of 15,676 every month for 3 years. At the end of 3 years, he has the car and his investment has gone up to 6,76,316/- @ 11.34 ROI. ( See URL below for Mahindra Finance FD).
http://www.hdfcsec.com/fixed-deposit/mahindra-&-mahindra/201106090356403499144

http://www.hdfcsec.com/Calculator/FDCalculator.aspx

Option 2 :
He pays up 4,90,000/- towards the car and frees up his EMI which he in turn uses for investment. At the same ROI of 11.34% ( Which is highly unlikely for a 3 year time horizon) his investment after 3 years grows to 6,74,557/-.
http://www.allbankingsolutions.com/R...or-India.shtml

Again,I might be wrong here but hey, the whole point is to learn.

Thanks

[puchoo]

If i had the money to buy the car upfront which i did for example when i bought the Fabia , i would still take a certain amount of finance instead of buying it out straight - for me its not about not having the money to buy the car but having enough for any contingency which may come up - so i would prefer to pay the interest rather than blocking it.

[alpha1]

The whole problem is that people are unwilling to accept that they simply cannot afford the car they are currently driving. Everyone wants to show off. Perhaps to himself. Perhaps to his relatives. Perhaps to the whole world.

Business/Money wise it makes ZERO sense to take loan for an item which does not generate revenue. Whether the asset value depreciates or retains its value comes after this.

[rajivr1612]

Mod team note: Removing [Font] tags, please avoid Copy Paste from external Font editors, also do a Preview before Submitting posts. Thanks.

Originally Posted by gops2009

This thread makes for some interesting reading, however, I have had this debate in different circles and the views have not been very different.

IMHO, each of the people are right in their own context. For me , I find it very difficult to measure everything in strict financial sense, because an excel spread sheet cannot measure the joy and pride of owning a car of your choice nor can it measure the convenience of owning one when you want one. As far as I'm concerned, I believe , we live only once and money was invented to buy security and comfort. If you are confident you can handle it even if you take a loan go for it!!, if you think it will be a discomforting feeling that you carry when in debt, then go with what would keep you in peace.
There is a price we pay for affording a convenience today that we could not afford without the help from a financial institution and that we call interest and all of us or atleast most of us have a certain value we think is fair to pay to achive a dream , this should decide the tenure and quantum of loan. My two cents

You are right. I think everyone has a fair idea of where they stand financially and can take appropriate decisions. This outcome of this topic has so far been so far even with both sides dishing out mind numbing financial mumbo-jumbo. If you ask me I am not an investment savvy person but that doesn’t mean I have not made decent investments (LICs, MFs, PPF and term insurance which is an investment for my family). I believe I am from the old school of thought which says don’t leave on credit. I know it’s difficult to follow this philosophy in these times but what’s the harm in trying. Heck even I am servicing a home loan. But that’s as far as I will go as far as taking loan is concerned. When I was planning to buy a car the first thing that I decided was not to take loan. And luckily when I changed job I withdrew my PF amount and used it partly to fund the car. And I still have some cash left for emergencies. And I am very happy with the decision and the peace of mind it offers.

[LP640]

Credit cards and Loans/EMIs are for situations where one needs capital Investment which will give returns.

But what masses are now used to is shopping to the brim with credit-card and EMIs and then use 70-80% of the salary to payback for credit-card bills and EMIs. Then they live all the remaining month again on credit-card(Banks Money), without any cash(self earned money) in their pockets!

To me this is simply spending more than what one should.

Even to buy any car, I would always LIKE to pay upfront. I only deserve a 10L car if I have 10L to buy it.

[carboy]

Originally Posted by RVD

Lets try this again using today's rates. One thing that one must remember is that while you take a loan, the option is pretty much limited to banks whereas when you loan out, there are a few more options available at your disposal.

My calculations were to show that the following principle is wrong
1) You can take a FD @ 7%. Then take loan against the FD at 9.4%, (9.4% is the interest if you have an EMI of 15,676) then you are coming out ahead because the balance on the loan you take is reducing and the interest on your FD is compounding.

The above is absolutely wrong as my calculation showed.

Your example proves that if you take a loan of 4,96,000 at 9.4% for 3 years (The interest at which you get a 15676 EMI is 9.4%) and you instead invest the money in a FD @ 11.34%, you will come out ahead. You don't need calculations to prove this - this is blindingly obvious.

If you have a very safe investment paying you 2% more than your loan interest - it's blindingly obvious that you should take it - but it's really difficult to find something like this.

Originally Posted by shankar.balan

As a mere "transactor" and not a "revolver" the bank credit cards people do not like me at all one bit because I don't afford them a chance to earn interest from my over-expenditure...

How do you know that they don't like you? Has your card been cancelled or have you been refused cards or something?

[RVD]

Originally Posted by carboy

If you have a very safe investment paying you 2% more than your loan interest - it's blindingly obvious that you should take it - but it's really difficult to find something like this.

It is actually not that difficult. People think that it is difficult because they don't do enough ground work. Having said that I do see where you are coming from. The whole reason for my post was to prove that one cannot make random statement such as " taking a loan is living beyond one's means". Not true at all. If a person has money locked up in other investments made in the past such as real estate, Mutual funds etc which is many times the loan being applied for, does that mean that he is living beyond his means ? I for one decided to not liquidate other assets because they were giving me better returns than the interest I pay for the car loan. Anyway for each, his own.

Thanks

[devsoftech]

I prefer loan. I have always taken a loan and for 5 years tenure. How loan has helped me, read on:
1. The depreciation while selling car for an upgrade does not pinch me. And I get back some cash in hand. A downright payment will otherwise make me realise that I'm losing a big amount. Just a mentality (this is not money wise)
2. After taking two cars on loan, 3rd and 4th car loan came without any hassles. May be I built a good credit rating in CIBIL. My salary also increased over a period of time. So with annual appraisal, I'm entitled to upgrade. The max eligibility also is an indicator, which segment of car I deserve. I'm not advicing that we should not be street smart, but being a petrol head when you have been eyeing her, and you want her, loan is the only way.
3. Agreed, more you pay upfront, the better. But then I prefer to keep it for emergency account, and not even for FD - I do not want to go to bank and break it when in need. Having a wife and kid, medical fund is my priority. I do not trust investments since the time sensex dipped to 17k from 21k. I lost a lot of money. FD/ULIP is my way to go when it comes to building funds like donation to school for my son's education.
4. I would not have enjoyed my life without these loans. May be would have been stuck with a compromise.
5. For my next dream car, I work with so much motivation and passion. The next hike is a reward for me that says, boy you deserve an upgrade. It just up's my eligibility. This loan makes me impulsive in my decision and live my dreams.
6. I prefer cash in hand for upgrades, aftermarket ICE and mods. Some of the shops do not accept credit cards :-)