[latentpotential]

Related Thread for Businessmen : Link

Saw a similar thread today, but for self employed/ business people. What about the rest of the Aam-Aadmi who work 9 to 5, and sometimes 9 to 9 as well?

My views are noted below, do feel free to add yours as well.

When I got my Swift, I took a loan from SBI with an EMI of just a shade below 10000 Rs (Loan Amount was 3.2 Lacs x 3 Years). By the time I was paying my last installment, my EMI was 13000 Rs.

This made me sit up and calculate the amount of interest I had paid already, and I remember the sum was enough to make me feel a bit odd. The hassle of getting the hypothecation removed (took 2 months and multiple rounds of the RTO) made it even worse.

At the same time, we started looking for the next Car, this time choice of vehicle being an Ertiga.

Multiple rounds of SBI and ICICI ensued, post which I managed to get a breakup of EMI against 6 Lacs of loan, the amount of interest paid over 3 years etc. My immediate decision on seeing the figures - No Loan.

I ended up buying the new car with a bag of cash plonked on a counter (not literal).

Now, is this right? Did I actually save money/ waste money I already had?
A side effect: While I intend to keep the Swift for a few more years, I am already looking for the next Car (An Automatic for my Mom), as there is no burden of any EMI.

Would like to hear the views of the TBHP members.

[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.

[rohan_iitr]

Your calculations are incomplete. There are many more factors to be considered here:

1. Considering that you have sufficient money to buy a car without loan, but still take a loan to buy the car - that money would be invested somewhere and provide you returns based on the nature of investment. For example: lets say you had invested this sum of 3 lakh in a FD of 3 years, you would have received approx 9% interest (cumulative) on the same. Now even if you have paid 14% interest (on reducing balance) to the bank on the car loan, your loss is only 14-9=5% and not 14% as you have calculated.

2. We also need to take into account the fact that the value of rupee depreciates over time. As on today, a sum of 3 lakhs may be considerable for a salaried person, but 4-5 years down the line, the same sum of 3 lakh rupees would loose its monetary value. In my personal opinion, it would be safe to assume a minimum 5% reduction in the value of rupee per year.

3. Then there are the other things in life which you can't put a price on. Lets say you just got married and don't want to go around on a 2 wheeler with your wife. Or you do not want to buy a second hand car because of the social stigma attached to it, or because of the perceived lack of reliability of a used car. Or you just had a baby and need to buy a 4 wheeler on an urgent basis.

In such cases, a loan provides a means for a salaried common man to buy a car without paying all the money upfront.

I feel that a salaried person should buy a car on a loan of the maximum possible duration available, and invest his own money elsewhere.

I personally have purchase my i10 with a loan of 3 lakhs for a period of 7 years. The EMI comes to 5k approx and hardly pinches my pocket. Of course I had some other reasons for opting for a loan. My employer pays interest subsidy on vehicle loan. We also get petrol allowance, which is considerably more for a 4 wheeler as compared to a 2 wheeler.

Last, but not the least, the biggest advantage of buying a car on loan is that you won't think about an upgrade until the existing loan is paid off.

Rohan

[DieselDon]

There is no one way about this.

Situation 1 : Someone in his first job & first month, without any backup from family - Does he/she not deserve a car ? No other way = Go for a Loan

Situation 2 : Someone who is neck deep into investing in other avenues (returning more than the Car Loan Interest Rate) - Financial sense = Loan.

I do not really understand as to why the 'interest paid' to the bank, is equivalent to someone looting us ? If we could invest the amount elsewhere, I am sure we could get more returns. Where is this 'opportunity' equivalent gone in comparisons ?

PS: No hard feelings. Just my opinion.

[TaureanBull]

In agreement with rohit and dieseldon.

1. The loan scenario and the logic that "if you cant afford the price you cannt afford the car" stands for everyone salaried, self employed,entrepreneurs etc.

2. I know of most of my friends,colleagues and relatives opting for loan and diverting money for more rewarding ventures like investment in property (second or third property, not the one "compulsory" house).

3. The difference in car loan (presently about 11%) and PF (8.8%, ) is just 2.2%.

My opinion : Go for loan unless you have surplus cash and no intention of investing it somewhere else.

[Prodigyy]

Even though there is little / no doubt that any sort of a loan (barring a home loan) would make people look silly when one comes down to calculate the total re-payment done, still there is a reason as to why various sort of loans have become a huge hit (more so in the case of a salaried person). I too am a salaried person, and i was recently out in the market for a vehicle.

I already have a home loan which costs me a pretty decent 15K per month from salary pie, now when i was on the lookout for a new vehicle, i had already owned hatchbacks from as long as my memory goes to and buying another hatchback would have neither made any financial nor any social sense, moreover, so i was left with no option but to go for a sedan ONLY.

Now, i had ready cash to be spent towards the new car of Rs. 6.5-7 Lakhs, with that Rs. 7 lakhs only, i would have managed only a bottom end version of any entry level sedan, that too Petrol, my usage of about 1300-1500 Kms per month and with the rising differential of fuels (at that time) demanded that i go in for a Diesel so going in for a Diesel hatchback (which would have added little / no value to me) would have been a complete waste.

I could have managed with another lakh or two maybe but that would have stretched my finances scarily thin and in case of adversities i would have been found wanting. This is where the Loan comes in. Any sort of loan gives one a price-less thing - peace of mind !! Peace of mind for me is a MUCH bigger thing than EMI's and repayments. I'll be happy and at peace with the knowledge that i have money in case any emergency / adversity comes up. Paying off 8-10K per month on my car won't really be a reason to worry and won't really have me tensed with my finances even in case of some untoward happening.

In the end, i ended up taking a Rs. 3.5 Lakh loan from SBI for my Sx4 D and the top model gave me everything i wanted from the vehicle besides saving me a good 50K from the money that i had earmarked for my car. (I used it up buying accessories and RD box is another matter altogether )

IMHO, the biggest aspect that a loan addresses is that it helps the aam-aadmi extend his budget, get a higher class of vehicle, still preserves the peace of mind of that same aam-aadmi.

Just my 2 cents

[mayankjha1806]

Well, Carboy, i disagree. If this would have been the case i would still be driving an 800 or Alto. What matters is to stay in the limit when it comes to monthly outgo in terms of EMI's.

I am not sure if this has been calculated. One of my friends bought new car on loan, which was later stolen. He immediately stopped paying EMI's citing police case and the insurance. Fortunately the insurance and loan both were with the same bank and he was not troubled much when it came to EMI recovery.

The IDV cleared all the loan on the car and he has some cash left to go buy another car. Not sure if he would have bought it with all cash down what would have been the scenario.

Another example from my acquaintances, the guy lost his life in an accident (Not in the loan car). The family stopped paying EMI's and asked the bank to take the car as there was no one to drive it. I believe it reduces the liability on the family members and they can use the cash earlier saved on something else. Car does not become a primary keeping item.

[carboy]

Originally Posted by rohan_iitr

I feel that a salaried person should buy a car on a loan of the maximum possible duration available, and invest his own money elsewhere.

That's really the strangest thing I have read. Assuming you are playing even just 12% interest on the loan, nowhere in the whole country can you get a sure investment providing you more than 12%.

Originally Posted by DieselDon

Situation 1 : Someone in his first job & first month, without any backup from family - Does he/she not deserve a car ? No other way = Go for a Loan

How exactly does one deserve or not deserve a car?

Originally Posted by Prodigyy

Even though there is little / no doubt that any sort of a loan (barring a home loan) would make people look silly when one comes down to calculate the total re-payment done, still there is a reason as to why various sort of loans have become a huge hit (more so in the case of a salaried person).

The reason they have become a hit is because people want to live beyond their means. Loans, Credit Cards etc make that possible. That doesn't mean it makes financial sense.

Originally Posted by Prodigyy

I could have managed with another lakh or two maybe but that would have stretched my finances scarily thin and in case of adversities i would have been found wanting. This is where the Loan comes in. Any sort of loan gives one a price-less thing - peace of mind !! Peace of mind for me is a MUCH bigger thing than EMI's and repayments. I'll be happy and at peace with the knowledge that i have money in case any emergency / adversity comes up. Paying off 8-10K per month on my car won't really be a reason to worry and won't really have me tensed with my finances even in case of some untoward happening.

I guess it's a point of view. Shouldn't knowing that one doesn't have to pay an installment every month give one a lot of peace of mind?

Originally Posted by Prodigyy

In the end, i ended up taking a Rs. 3.5 Lakh loan from SBI for my Sx4 D and the top model gave me everything i wanted from the vehicle besides saving me a good 50K from the money that i had earmarked for my car. (I used it up buying accessories and RD box is another matter altogether )

IMHO, the biggest aspect that a loan addresses is that it helps the aam-aadmi extend his budget, get a higher class of vehicle, still preserves the peace of mind of that same aam-aadmi.

I agree that it helps aam-aadmi live beyond his means, but I don't agree that it allows peace of mind.

Originally Posted by mayankjha1806

Well, Carboy, i disagree. If this would have been the case i would still be driving an 800 or Alto.

And that's a bad thing, why? Also have you calculated what kind of cash you would have had today, if you hadn't paid an EMI for x months.

Originally Posted by mayankjha1806

What matters is to stay in the limit when it comes to monthly outgo in terms of EMI's.

If you instead live your present car & save money for a new car, you would end up paying far less money for the new car if you are paying cash down.

I am not saying people shouldn't take loans. All I am saying let's not say that it's the financially smart thing to do.

Originally Posted by mayankjha1806

I am not sure if this has been calculated. One of my friends bought new car on loan, which was later stolen. He immediately stopped paying EMI's citing police case and the insurance. Fortunately the insurance and loan both were with the same bank and he was not troubled much when it came to EMI recovery.

The IDV cleared all the loan on the car and he has some cash left to go buy another car. Not sure if he would have bought it with all cash down what would have been the scenario.

If you have actual figures on what was the actual cost of the car, what was the download payment, what was the EMI, what was the insurance money paid after the car was stolen - we can calculate how much money your friend would have had to buy a new car. I am pretty sure he would have come out financially ahead without the loan.

Originally Posted by mayankjha1806

Another example from my acquaintances, the guy lost his life in an accident (Not in the loan car). The family stopped paying EMI's and asked the bank to take the car as there was no one to drive it. I believe it reduces the liability on the family members and they can use the cash earlier saved on something else. Car does not become a primary keeping item.

For one thing, I am not going make decisions of whether to buy a car outright or on loan based on what is going to happen if I die.

Other than, again if you have actual figures (cost of car, EMI already paid when death happened etc) we can calculate what method would have been financially better. I don't believe that the family would have saved any cash. The only thing advantageous would have been that they wouldn't have to look for buyers for the car.

[Prodigyy]

Originally Posted by carboy

The reason they have become a hit is because people want to live beyond their means. Loans, Credit Cards etc make that possible. That doesn't mean it makes financial sense.

Loans never make any financial sense, this conclusion is foregone, done & dusted. The first sentence of my post supports my point as far as the financials are concerned. A loan is meant to ease the life of a person and this is why they have stuck it big time with the Indian (& world-wide) masses.

Originally Posted by carboy

I guess it's a point of view. Shouldn't knowing that one doesn't have to pay an installment every month give one a lot of peace of mind?
I agree that it helps aam-aadmi live beyond his means, but I don't agree that it allows peace of mind.

IMO, a monthly installment giving sleepless nights & stressed financials would be in case someone extends his EMI's beyond his means. If someone earning 30-35K per month says he/she is comfortable with an EMI outgo of 20K, then he/she is most definitely turning a blind eye to a very imminent financial constraint sometime later. At the same time, an EMI outgo of a similar 20K won't really be a point to ponder / worry for some-one who would be earning anywhere between 70-100K per month.

In my case, i won't be worried at all for an EMI of 7.5K when i know i still have a huge chunk of my monthly income left for me to manage the rest of my monthly expenditure. It's only when the EMI's would come dangerously close to 40-50% of my monthly take home that i would loose peace. To me, sound investments (which can be used in case of urgency) along with a enough liquidity in case i meet some adversity is makes more sense.

As said earlier in this thread, in the end, the outgo of EMI's with respect to the monthly take-home is what it all boils down to. When your monthly expenditure coupled with the EMI's is only enough to make ends meet read zero savings per month / annum, that is only when one should be worried. If the monthly expenditure coupled with the EMI's still results in some-one saving enough then i guess its the loans that would make more sense as well as giving peace of mind.

[theMAG]

From my learnings, if I were in the market for a car today (high rate of interest, market volatility, increased running costs), I would make it a point to invest a majority of the car cost personally and look at a loan only for the remaining minority of the cost. To me, this is inline with the salaried masses' priority of probably keeping variable costs and liabilities under control.

[hellmet]

If you're one of those that cannot sleep if you owe someone (bank) something (emi), like me, then you're much better off buying with cash, IF you have cash, i.e. Don't scrape all your savings just to avoid a car loan.

2.5 yrs ago, I opted for a low FIXED interest 5 year car loan because I didn't have money for full cash down. I highlight fixed because that is how you have peace of mind. These bank fellows will increase rates at the drop of a hat and your loan will never seem to end. I do have to compromise some peace of mind knowing I owe the bank, but the benefits outweigh the negatives.

Right now, I can pay off the remaining loan in the blink of an eye, but my company subsidises loan interest and I get better returns in other investments than by paying off the car loan.

Also given India's horrendous rate of inflation, your money will be losing its worth faster than you can count, so you'll end up coming out as a winner.

Final note: When I pay something (anything) in cash, I truly and honestly understand the value of what I'm paying for and have a sense of proud ownership with that item. Maybe because you're paying it with what you earned with hard labour, and not what you WILL earn in the future. You will also tend to stick to the budget and be practical when you know how much you can spend, v/s having the luxury of extending the budget with credit.

Just my 10 cents

[GTO]

*Mod Note : Public Poll Added. Should make this discussion fun*

[MHG]

IMO the only thing that makes sense if buying on loan is real estate since if invested wisely it appreciates really quick, and even this is only if the cash is not available at the moment.

When it comes to buying a car, my personal benchmark is that I should be able to save up for buying it outright without feeling the slightest pinch financially.

[Prodigyy]

Originally Posted by theMAG

From my learnings, if I were in the market for a car today (high rate of interest, market volatility, increased running costs), I would make it a point to invest a majority of the car cost personally and look at a loan only for the remaining minority of the cost. To me, this is inline with the salaried masses' priority of probably keeping variable costs and liabilities under control.

Bang on !! I followed the same principle while buying my vehicle. Any salaried professional should buy only that car for which he can pay at least 60-65% of the cost up-front in cash. The remaining 35-40% might as well be a bank loan, i am pretty sure with this principle in mind, most salaried professionals won't be burdened or pinched with the EMI's.

[speedmiester]

I would prefer not to have an additional burden of an EMI for a Loan.

I love pre-owned cars and if you have the patience you can buy some great beauties for some great price.

Just to give an example, a friend of mine bought a new punto emotion diesel last year because his parents did not want him to get a used car. He put in a down payment of 1.5L and an EMI of ~9500/- per month.
Around the same time, I was looking for a second car. Everyone were asking me to buy a new car as we have another car which was bought pre-owned. I was not interested in buying a new car and was looking out for options. I got a lead on a single owner well maintained Baleno for a mouth watering price of Rs 2.15L. I bought the car with my savings and spent a little more to suit my taste.
Every time my friend sees my car, he is so jealous because I have a sedan.
Even though my car is petrol and my fuel bills are close to 5k per month, since I don't have an EMI to worry about, I can enjoy the smooth, refined and high revving petrol engine for a price close to a Tata Nano. I have driven the car for over 15000 kms in the past one year, not a single problem or fault to complain about.

There is a lot of advantage in settling for what you can afford. But it's my personal opinion.