[shankar.balan]

Hire Purchase driven consumerism began in the Developed markets.

At that time in India only those who could afford the money could buy a car or a house as there were no loans available from the organized sector.

As part of the strategy to unlock consumerism and thereby drive growth, once the liberalisation of our economy started off, it was adjudged right and proper to create easy access loans for salaried people.

Over the last ten-fifteen years one has seen the difference these steps have made...

There is nothing wrong with buying your vehicle of choice on a loan - this way you get to enjoy the use of a good vehicle by paying a small amount each month - it is especially useful if you wish to fuel your aspirations and do not have the cash resources to do so.
However, as with any loan, it is worth exercising caution and to be very careful not to over extend one's self.

From a Financial stand point, even successful business people usually take loans and use the banks money which they get at an "acceptable cost", to buy these depreciating assets. That is because they rotate their own money (which is always available to them at zero cost) to turn around profits, arbitrage and of course, higher interest earnings. This way they are able to keep ahead of the game.

For the salaried person, he/ she has to save his/ her hard earned cash as well as service loans for housing and vehicle along the path of life. Other than property and/ or gold, share market and perhaps a few MF's, there are hardly any other instruments whose returns/earnings are able to outstrip the burdens of interest.

Invariably though, property and gold are investments that will benefit the next gen (inheritor) more than the current gen (investor).

There is no right or wrong answer here - different strokes apply for different folks, so while some may be fortunate to command large cash flows enabling them to buy cars etc outright, a large majority of wage earners cannot do so and are forced to resort to loans.

If, like the developed nations, there were a first class public transportation system available here, I guess that the "car loan/ hire purchase" businesses would not do so well - this in turn may result in a good sized drop in interest rates too!

[carboy]

Originally Posted by csateesh

3. If you choose to sell the car after 2 / 3 yrs you can do so and limit the liability to a certain extent which may not be possible

Can you elaborate on this - I am not sure what you mean here.

Originally Posted by csateesh

4. Finally buying a liability (asset class) using spare cash isn't always recommended.

Why?

Originally Posted by csateesh

5. Finally the biggest reason of all - Thanks to inflation INR is depreciating and if you use it to buy a liability that depreciates effectively landing a double whammy

I don't understand how you avoid the double whammy by taking a loan.

Originally Posted by csateesh

Would like to quote Warren Buffet - To be successful you must make the money work hard for you !!

I am sure we all agree with this. The only thing is we don't agree about is if taking a loan and paying interest on it is a way of making your money work hard for you. I think it would be making your money work hard for the bank you are taking the loan from.

[latentpotential]

Wow, this has been an interesting and controversial topic it seems. Thanks GTO for adding the Poll, shows the diversity of the group. Next TBHP meetings should have both sides sit on separate sides of the tables, else we will see a lot of fisticuffs!

While everyone has interesting views, and members do eloquently justify each point they make/ others do it for them, this thread is for the Salaried Class.

Are you sure of the economic situation in 2 years? 4 years? 6 years? Even the best of the people in Core Finance are not aware of what is to come. If we reach a situation like the US of A faced, wont this loan be a cripple to you/ your family?

Are you so sure of your job security that you would be able to repay on time every time?
Are you certain that you may never lose your job? Your Co. will never shut shop?

I have already faced this situation. Hence the topic is of very close interest to me personally.

Personal opinions aside, it would be still more interesting to see more thoughts from people.

Personal finances are extremely subjective topics and often there is no right way/ wrong way. It is heavily influenced by your upbringing, parental mindsets, work experiences, income level changes (growth/ steadiness) and most importantly "desires".

Looking forward to more interesting reads on this topic

[RVD]

I have voted in the favor of "LOAN" as against "OUTRIGHT". Here is why :The calculation is not as simple as saying that you take a loan from the bank at 11% whereas you loan the bank at 9% and hence you lose 2%. One must remember that the 11% is reducing and 9% is compounding. Lets take an example of my car loan of 4,90,000/-.(I had cash as well at the time and did not need to take a loan)

1) Loan amount - 4,90,000/-
EMI - 15,676/- PM
TENURE - 36 Months
AMOUNT PAYED AFTER 3 YEARS - 15,676 * 36 = 5,64,336/-
AMOUNT PAYED OVER 4,90,000/- 5,64,336 - 4,90,000 = 74,336/-
(PS: LOAN INTEREST ONLY 9.98% BUT IT IS NOT HARD TO FIND VEHICLE LOAN AT
CLOSE TO THE SAME ROI AT 10.5%)

2) AMOUNT INVESTED IN BANK DEPOSIT - 4,90,000/-
INTEREST COMPOUNDING ANNUALLY - 7%
INTEREST EARNED AFTER 1 YEAR - .07* 4,90,000/- = 34,300/-
INTEREST FOR 2ND YEAR - 4,90,000 + 34,300 * .07 = 36,701/-
INTEREST FOR 3RD YEAR - 4,90,000 + 34,300 +36,701 * .07 =39,270/-
MATURITY AMNT AFTER 3 YRS - 4,90,000 + 34,300 + 36,301 +39,270 = 5,99,871/-
NET SAVING - 5,99,871 - 5,64,336 = 35,535 /-

PS :1) One can easily get returns higher than 7% used for calculation.
2) Interest is compounded quaterly and hence the actual maturity value would
be even higher for a bank deposit.
3) This is my personal basis of calculation to arrive at loan vs cash decision.
This calculation could be fundamentally flawed.

Thanks

[abeerbagul]

Suppose you take a car loan of 4,90,000 and then put your cash in a Fixed Deposit at 8.75% p.a. in HDFC Bank for 36 months. Compound interest is calculated quarterly by the bank.
After 3 years, you get in hand 6,35,286.

Suppose you do the opposite, instead of taking car loan for 4,90,000, you pay cash outright.
Then you create a recurring deposit for 36 months with HDFC Bank with monthly amount of 15,500 at 8.75% p.a. So at the end of 36 months, you get in hand Rs 6,39,448.

(These are today's interest rates from www.hdfcbank.com)

[latentpotential]

Originally Posted by RVD

...
2) AMOUNT INVESTED IN BANK DEPOSIT - 4,90,000/-
INTEREST COMPOUNDING ANNUALLY - 7%
INTEREST EARNED AFTER 1 YEAR - .07* 4,90,000/- = 34,300/-
INTEREST FOR 2ND YEAR - 4,90,000 + 34,300 * .07 = 36,701/-
INTEREST FOR 3RD YEAR - 4,90,000 + 34,300 +36,701 * .07 =39,270/-
MATURITY AMNT AFTER 3 YRS - 4,90,000 + 34,300 + 36,301 +39,270 = 5,99,871/-
NET SAVING - 5,99,871 - 5,64,336 = 35,535 /-

PS :1) One can easily get returns higher than 7% used for calculation.
2) Interest is compounded quaterly and hence the actual maturity value would
be even higher for a bank deposit.
3) This is my personal basis of calculation to arrive at loan vs cash decision.
This calculation could be fundamentally flawed.

Thanks

RVD & Abeerbagul, as a salaried person, you have no avenues of escaping Taxes on the above Interest Income as well. The Banks report your interest income based on PAN number, and if you don't file it in your ITR, a nice registered post at the doorstep.

[RVD]

Originally Posted by latentpotential

RVD & Abeerbagul, as a salaried person, you have no avenues of escaping Taxes on the above Interest Income as well. The Banks report your interest income based on PAN number, and if you don't file it in your ITR, a nice registered post at the doorstep.

Well, as a person with cash in hand you can always decide the way you want to invest. For example, you could invest in your parents name if they do not have any taxable income.There are many other avenues if one really wanted to. Just depends on how motivated one is. BTW, the interest that I quoted of 7% is way less than what one can actually earn. ( My mother has invested in a company's NCD with compounded interest of 12.75% and she is not liable for any tax as she still does not fall under the tax bracket)

There is no financial decision that is "one size fits all". The reason that I put up what I did was to show that one can actually take a loan and come up on top.

Thanks

[engrohit]

Originally Posted by Prodigyy

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.

Well I paid, 50% upfront and took 50% loan for duster purchase. The EMI works out to be approx 10K per month. That was the max EMI I could afford and I badly needed to buy Duster coz "I Loved it".

[Warwithwheels]

Originally Posted by latentpotential

...What about the rest of the Aam-Aadmi who work 9 to 5, and sometimes 9 to 9 as well?

This discussion would not lead us anywhere unless and until we define a particular income category and corresponding financial commitments. A salaried professional could earn as low as 6 Lacs p.a or even lower to 60L p.a or even higher, working from 9 to 9!

The guy who earns 60L p.a would in all probability not take a loan to buy his mom a Honda city AT or a Nano. Where as a guy earning 6L p.a would need some financial assistance to buy the same vehicle.

Unless we freeze in on some numbers and take the discussion forward, I personally see no point in this thread except that people go on to relentlessly defend their baseless calculations.

More importantly we need to remember that a Family is not a profit making business entity. Am not too sure even if investment firms do so much research before staking their money on an investment.

PS: Am not denying that we need to be prudent in managing our finances. But taking decisions only based on numbers does not always work in a family set up. At the end of the day, its only the peace of mind and sense of financial security that matters most, atleast to me

[carboy]

Originally Posted by RVD

One must remember that the 11% is reducing and 9% is compounding.

This is true without being relevant. All loan agents and bank employees are taught to use this silly reasoning, I think. A close friend who is a Bank Employee once told me this exact thing - and he wasn't even trying to get me to take a loan or something.

Think of it this way.
The 9% is you loaning money to the bank.
The 11% is the bank loaning to money to you.

Do you really think one is reducing and the other is not. And one is compounding and the other is not. And that the one which is and the one which is not is arranged in such a way that it's more advantageous to you as compared to the bank.

Originally Posted by RVD

This calculation could be fundamentally flawed.

It is flawed because you haven't taken all factors into consideration. The 15676 which you don't need to pay every month - you are not going to stuff it into a mattress instead. You can earn 7% on that also.

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?

[su1978]

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.

Hi mate, hope you would have heard about something called as "loan suraksha". This is normally clubbed with the interest which increases the rate by .25% only and many aspects are covered like "what if you loose your job", "what if your vehicle is stolen", "what if the person dies". In the case of death, the complete amount is paid to the Finance company and in case of loss of job, they cover upto 6 emi's.

Secondly, why would i buy something thinking that i will die. of course, it is another logic that i should think about the best and be prepared about the worst.

[mayankjha1806]

Originally Posted by Slick

Thanks a lot to @carboy and @MayankJha1806 though I think it got a bit heated up, The quality of posts was good.

, It never got heated up, we are from different line of thinking, hence the difference. There is no wrong or right. Whatever works for you is right for you. Today even Debt funds (Which i consider very safe) beat the Loan interest rate.

I am not proposing everyone should buy with Loan, all i am saying if you have better use of lying cash, either in terms of investment (or whatever). Also please remember everyone does not have this luxury.

Originally Posted by Modifiedsachin

2. Invested 9L in GOLD (Had an option of Gold binds or what ever they
call, or raw gold, opted for raw)

If it worked for you, good for you, but please do remember Gold follows a 12/20 year cycles and there would be times it would fall. So if you have accounted for that, awesome. Do read John Mauldin blog.

Originally Posted by latentpotential

Are you sure of the economic situation in 2 years? 4 years? 6 years? Even the best of the people in Core Finance are not aware of what is to come. If we reach a situation like the US of A faced, wont this loan be a cripple to you/ your family?

Are you so sure of your job security that you would be able to repay on time every time?
Are you certain that you may never lose your job? Your Co. will never shut shop?

I am glad you brought this up. Job security is a myth, retaining and maintaining a job depends on a lot of factors, some of them are economic and some other are on "How good you are?". If you have the capability, companies are always looking for talent, i would rather invest in building/enhancing my talent than worry about economy (Which is outside my control). I have personally seen job loss and know how to survive one, so much so that i believe slowdowns are good for economy and individual. It helps you rediscover yourself.

[Sn1p3r]

$0.02 from a guy whose been on both side of the border.

I was once a salaried employee then a businessman and now a consultant (do not what what category will accept me )

I have not voted as this discussion will only yield split decision based on one's ability and affinity to make money/love automobiles. A depreciating asset is not to every investor's liking.

If I had money while being salaried, I invested outright in a depriciating asset that I bought and loved it, my priority was right I lost money but I gained love for life.

Thus I wont equate the two. While I was in business, I required more capital and thus taking loan was imperative. So no harm done made more than what I lost as I was in control of my business not a mutual fund manager.

For the calculating minds no matter if you are salaried or not: It is always better to think realistically if you can outstrip the loan % whatever it maybe by investing (you have become a trader/businessman taking risk). If you think you can outrun a bull/bear market or invest in property or MCX or metal. Think again, it is always a cycle and if you catch a good wave its good but sometime you may be caught in a whirlpool as economic scene might change.

Someone mentioned Rich Dad Poor Dad. I do believe he knows that the author has filed for bankurptcy this year. Catching a big wave is different than weathering it up. He had some good points but if you follow him to the core, then you should leverage your entire assets to create more wealth but again outrun the markets.

So in the end its a personal choice of what you want. If you aspire for a car beyond your immediate means then take that loan (Indian banks never give you loan of more than you can afford to the brink of bankruptcy) and if you have other the restraint then paying upfront makes perfect sense.

Cheers!

[sudeepg]

Originally Posted by latentpotential

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.

Of course you saved money here! If you purchased it on loan, you are definitely spending more money to get the car. My suggestion is - if you have the money to spare, then always go for cash purchase. Loan is for people who cannot commit the amount but still want to purchase a car, for whatever reason it is. Having an automobile has it's definite advantages. For instance it is much safer for you and your family, saves you from rain, you can do long drives, and so forth, but most importantly fun too!

However I would recommend that a car purchase be evaluated carefully. If you are an enthusiast, then there is no question you need to get one that you like. For many others, it's a source of commute from point A to point B. In that category, it won't make sense for a bachelor to invest in an expensive car by going in for loan, but it certainly makes sense for a family though!

For the ones opting for loan, there is a cost advantage if you get company leased cars, provided you can complete the tenure.

[kingofmyworld]

I would always prefer buying a bike/car on cash upfront if you're a salaried employee and you have enough cash in hand or wait for some more time and buy one once the cash has been arranged/accumulated. Why do I say this? Because it gives mental peace! It gives me peace! It always does!

End of the month when your salary gets credited, yuo don't have to think twice before spending it because sometime during the month an EMI will be debited and if enough funds arent available, your CIBIL score will go for a toss and any kind of loans/CC you apply will be rejected.

Also, You can avoid hypothecation and the long waiting period to get the hypothecation removed from the RC.

If you have to sell your vehicle before the loan tenure completes, you anyways have to pay the pre-close amount/interest before you get NOC from the bank. Dealers pay you more in case your car is not hypothecated.

It's a personal opinion. I've bought a couple of bikes(P220, CBR250R), a moped(Aviator) and a car(Figo diesel Titanium) on full cash and only I know how relaxed I am through out the month. I have all the take home salary to spend at my convenience and choice. I never had to think twice before buying something for household purpose or personal purpose, go for touring, mods on my figo or anything for that matter. All I have to make sure is if my account has the amount enough to get the thing done or not.

End of the day, You're a free man as long as there are no EMIs chasing you.