[Warwithwheels]

Remember reading in some other thread that buying a car on full cash would trigger the panic button of your tax man.

I would ideally invest 50% of my budget in a FD and take a loan against it. For the reminder I would opt for a car loan.

What I gain by above is 50% of my finance is obtained at a very low cost, say 2% Above deposit rate and since the rest is funded by a car loan, my RC is hypothecated as well. That would save unnecessary hassles with the tax man.

[lapsi]

Originally Posted by 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.

In this calculation, you have missed one thing: While your interest income is taxable, the interest paid is not tax deductible.

Only if you are investing in a tax free instrument like a debt Mutual Fund with a growth option or if your investment is in the name of someone who is not taxable, then the above calculations will be valid.

Originally Posted by Warwithwheels

Remember reading in some other thread that buying a car on full cash would trigger the panic button of your tax man.

The tax man will not be such a problem for salaried individuals.

Originally Posted by Warwithwheels

I would ideally invest 50% of my budget in a FD and take a loan against it. For the reminder I would opt for a car loan.

This is just FYI. Remember that both your OD and car loan will appear in your CIBIL report thereby showing that you are using a higher line of credit. This may be good or bad depending on other facts and circumstances in each case.



I would also like to add a different angle: That of capital protection and formation. The basis of this is that loan repayment is compulsory but saving is optional.

If you pay upfront with your savings, you will save some interest but at the end of the duration of the loan, your savings may also be nil if you did not manage to save. But if you are a disciplined investor who saves regularly, this is your best bet.

Alternatively, if you are not such a disciplined investor, you can invest in a tax free instrument for the duration of the loan and at the end of the term, your capital would have grown and your loan will be nil. By doing this, you will pay out interest but have a chunk of capital at the end of it. Consider it a forced saving, as the loan will get repaid.

Cheers!

[VW2010]

Pure finance talks about NPV.

Heart talks about owning a Car.

To me the logic is simple. If i have 20L will i get a Jetta or a SX4 or a Nano and invest the rest based on the cars i chose?

There are too many options based on priorities. Someone with double earning and no loans may opt to actually get a 3 or 5 series taking loan for the rest of the amount.

Others may actually prefer buying a Nano and investing the rest in a land that will double or triple.

More than loan interest, the interest on owning "the car" matters more here. Priority between investing and spending rather for cars are not an investment.

[mayankjha1806]

Originally Posted by carboy

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%.

Well to give you some numbers, I invested the money in defensive + aggressive portfolio and my investments over 4 years gave me over 20% CAGR returns, which i later used to buy a property. If i would have put in this money on Car i would not have been able to afford a property. Yes there is discomfort for 4 years EMI hitting your bank account but if money saved is wisely invested (With knowledge) it would give good - massive gains.

Even in my second car i almost did the same, and we are looking at buying our second property. Albit this time the returns from my investment arent as fancier as last time but are still 16+% CAGR. Which i would have lost if i would have bought car outright.

[r0ckstar.1]

Loan anytime for salaried people. Like most of the members opinionated, invest your cash reserves on something else like real estate (atleast in Bangalore it's rewarding) or stock market. It's good to have a no EMI life, but if you have a good visibility into your professional life as a salaried person, EMI is the best option.

I have a Fabia for which i bought a 3L loan for 3 years with close to 10K a month. it doesn't pinch me more on a monthly basis. I have another year of this loan and I am planning for a SUV now (for me only) on a loan of about 8-9L. The Fabia goes to my wifey, who's very excited to get it as a replacement to her current Maruti.

In the end, know your calculations and obligations before committing for an additional EMI. Having said all the above, if you are buying an used car, buy it on full cash. THe calculations on interest amount, plus the uncertainty over the reliability of the vehicle etc doesn't make sense to buy it on loan.

[kartikk]

I bought my car in 2010 paid via credit card used 5 cards in all to make the payment, but it wasn't easy to convince anyone on the benefits of upfront cash payment. (I cleared the credit card bills within time and converted all of the points into gift vouchers to keep the family happy) Added benefit my CIBIL score zoomed though the roof and it was a cake walk to get a home loan

All depreciating assets in a growing economy always pay in cash and all appreciating assets take a loan. A simple logic you can work all the math all your life but this will make sense for a long time.

[carboy]

Originally Posted by Warwithwheels

I would ideally invest 50% of my budget in a FD and take a loan against it. For the reminder I would opt for a car loan.

What I gain by above is 50% of my finance is obtained at a very low cost, say 2% Above deposit rate and since the rest is funded by a car loan, my RC is hypothecated as well. That would save unnecessary hassles with the tax man.

So you will first lend the bank some money at 9% interest rate. And then you will ask them to lend you back that money and you will pay them 11% interest rate.

That, my friend, is a wonderful plan. It's plans like these which make people millionaires. Of course, you have to start out as a billionaire.

I prefer to go in a Hybrid way.

-Ensure that your portfolio of FD's + ULIP + Equity + LIC should be 2Xcar price(considering date of purchase and invested amount. not the maturity amount. Assuming no other loans one has.).
-Go and take a loan for 85% of the car price. Provided your EMI % should be around 20-25% of your take home.
-IF you have surplus cash in hand at the end of the month, you pay it to the banker in the form of early prepayment.
-If some urgent need or some lucrative property comes up, use your FD's or other assets. This should give you the flexibility of taking up multiple things.

Disadvantages.
Hypothicated vehicle,
EMI,
You might pay up around 2K an year for each Lakh taken from bank.

I prefer to go this way. If something lucerative comes up, i can invest and i can afford.

[carboy]

Originally Posted by DieselDon

I do not really understand as to why the 'interest paid' to the bank, is equivalent to someone looting us ?

Who said that the bank is looting us?

Originally Posted by DieselDon

If we could invest the amount elsewhere, I am sure we could get more returns. Where is this 'opportunity' equivalent gone in comparisons ?

Banks must be filled with stupid people. They are giving you money at 12-14% interest when they could themselves be using that amount to invest the amount elsewhere and getting much better returns. May be invest in realty like someone else suggested. Especially considering banks usually are filled with guys who spend their whole life studying & working in finance, economics and investments. May be nobody has told them about the concept of 'opportunity' equivalent lost.

Next time I meet a banker, I will laugh at his face for doing something stupid and silly like giving loans to people.

Originally Posted by mayankjha1806

Well to give you some numbers, I invested the money in defensive + aggressive portfolio and my investments over 4 years gave me over 20% CAGR returns, which i later used to buy a property. If i would have put in this money on Car i would not have been able to afford a property. Yes there is discomfort for 4 years EMI hitting your bank account but if money saved is wisely invested (With knowledge) it would give good - massive gains.

Actually, I asked about sure investments giving you more 'sure' returns that whatever you pay for the car loan.

Originally Posted by gemi_kk

I prefer to go in a Hybrid way.

How is this a hybrid way? Don't banks ask for 10-15% down payment on loans anyway? I think your way is called the 'loan' way.

[DieselDon]

Originally Posted by gemi_kk

I prefer to go in a Hybrid way.

-Ensure that your portfolio of FD's + ULIP + Equity + LIC should be 2Xcar price(considering date of purchase and invested amount. not the maturity amount. Assuming no other loans one has.).
-Go and take a loan for 85% of the car price. Provided your EMI % should be around 20-25% of your take home.
-IF you have surplus cash in hand at the end of the month, you pay it to the banker in the form of early prepayment.
-If some urgent need or some lucrative property comes up, use your FD's or other assets. This should give you the flexibility of taking up multiple things.

Disadvantages.
Hypothicated vehicle,
EMI,
You might pay up around 2K an year for each Lakh taken from bank.

I prefer to go this way. If something lucerative comes up, i can invest and i can afford.

@gemi_kk - That is one ultracool option you have there.
Net Net - One pays interest on the car loan @ (Car Loan Interest Rate - FD/ULIP/LIC Interest Rate) ~ 3/4 %. Cool.
Hedging (provided both rates are linked ) & Retaining Liquidity at the same time !
I have never had that kind of idle money to look at a FD (always get invested much earlier) & hence I have not tried this. But is surely worth a try.

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.

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.

Cannot agree more. Loans & Credit Cards are being misused and people are harming themselves every day.
I personally know of a few friends who were bit so hard that they have vowed to never use a Credit Card again.

That said, Loans & Credit Cards are wonderful financial instruments for those who know how to use them. We should get educated on the same.

Originally Posted by carboy

Banks must be filled with stupid people. They are giving you money at 12-14% interest when they could themselves be using that amount to invest the amount elsewhere and getting much better returns. May be invest in realty like someone else suggested. Especially considering banks usually are filled with guys who spend their whole life studying & working in finance, economics and investments. May be nobody has told them about the concept of 'opportunity' equivalent lost.

Next time I meet a banker, I will laugh at his face for doing something stupid and silly like giving loans to people.

There are few category of banks called Investment Banks who exactly do the same thing. Some banks have the guts to face complexities involving the advanced financial instruments(read options & derivatives) & in the worst case another 'subprime mortgage crisis'-like situation. I will not explain further on why most people are not aware of Investment Banks.

Originally Posted by DieselDon

There is no one way about this.

PS: No hard feelings. Just my opinion.

I have probably not expressed myself in the best possible way. Let me retry.

All of us know that sum of EMIs on any Loan is more than the Principal.
It does make financial sense to spend only what is necessary (& not go for a loan ?).
Some(including me) would disagree though. Key reason's
-For most, Financial Sense is not the only thing in the world.
-For some, The money can be used better (not necessarily in a 'sure return' mode)

How about taking the public transport/bi-cycle and saving a ton of money ? Why bother about buying a car in the first case ? Makes utmost Financial Sense.

How many times has one wondered, 'only if I had that money to invest in this coffee shop business, land in a upcoming locality,..'
And many times people also wonder 'I should have listened and kept the money in the bank..'

To sum up : There is no one way about this.
Half the time - People go for a loan. [some cannot afford to pay up, some have other investments lined up, some just do not want pay upfront]
Other half - No Loan. [they have been bit hard, want peace of mind, do not want to spend more than necessary, do not need a loan]

I voted for 'Loan', since I just went for a Corporate Lease Loan Option.
If it was not for the Lease, I probably would not have gone for a loan (or even a new car)

Cheers !

[carboy]

Originally Posted by DieselDon

There are few category of banks called Investment Banks who exactly do the same thing.

I do know that. I have actually even interviewed at a couple of them. But the point is the all banks who are into giving loans are plain stupid.

Originally Posted by DieselDon

Other half - No Loan. [they have been bit hard, want peace of mind, do not want to spend more than necessary, do not need a loan]

You forget the most important reason - they know there isn't any 'sure' investment they can get which can provide more returns that what they pay on interest.

I know this person - a stock market wiz. He retired from his engineering job at age 45 when he realized that his dividend income was more than his job income. He is 100% invested in the market in stocks - i.e. he does not have a single fixed deposit or single mutual fund or a single bond or company fd or anything. He is 100% invested in the stock market. He lives on dividend income and reinvests capital gains again in the market. He is not a trader either - almost all his profits are long term capital gains - he pays zero income tax.

He buys his cars outright - not on loans. With his expertise on generating returns in the stock market - just consider the 'opportunity' lost.

[Warwithwheels]

Originally Posted by carboy

So you will first lend the bank some money at 9% interest rate. And then you will ask them to lend you back that money and you will pay them 11% interest rate.

That, my friend, is a wonderful plan. It's plans like these which make people millionaires. Of course, you have to start out as a billionaire.

Hi Carboy, request you to please make an effort to understand the underlying factors of the other person's view point before making a mockery outta it.

Lemme tell you the benefits (which works for me) by adopting the above strategy:

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.

However, if I put down all my cash upfront, I loose the opportunity of investing the money. I will be able to earn interest on the deposit only as and when the savings (end of every two months) is made and moreover only on the smaller amounts (40,000 +)

[pganapathy]

Any loan taken means you are living beyond your means. I too would love to own an S-class and a 5 acre yard for my house in Bangalore or Bombay. No, I can't afford it.

The only guaranteed returns on investments are FD's and bonds. Everything else is a gamble. Yes, even land comes in that category.

For me the smart way of doing it is make sure you can afford what you are buying.

I have enough classmates who were badly hit by the recession of 2008. Either they lost jobs or had a salary cut and were forced to juggle funds or even return houses/cars/other things they bought on EMI/credit cards. That for me is not worth the peace of mind of living within my means but knowing I will not lose it because of some unforeseen circumstance

[vinair]

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.

Yes, unless I also smuggle!!! Jokes apart, buddy, if I were to save money and then buy a car, I will be old enough to just walk up to the car, open the door and just sit... at the rear, forget driving.

May be not everyone is blessed with a fortune to simply dump cash (earned by some one else) on a model and hold his head high and say 'I bought my car with cash, not on loan'

When a luxury turns into necessity, no matter what, loan is the best option!

[mayankjha1806]

Originally Posted by carboy

Actually, I asked about sure investments giving you more 'sure' returns that whatever you pay for the car loan.

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. So over time your delayed purchase will continuously outpace your rate of increase in investment. One delays a purchase decision and invests money elsewhere so as to beat Inflation so as in future one can buy that item and save some money. If that is not the case why would you want to delay the purchase.

Originally Posted by pganapathy

Any loan taken means you are living beyond your means.

Maybe, sir, thats your opinion, and if that works for you, good for you. Unfortunately somehow it does not work for me, and it never will. I dont think taking loan and buying car is wrong if one has made healthy financial calculations. I have better use of the lying cash then buying a car, and i know there are many like me. My Car EMI's have been always at about 10% of my monthly take home, and frankly i do not see that as living beyond my means.