[ku69rd]

@mods,
Suggest we add car lease as an option? Would prefer that straight away as it would help me save income tax as well. You don't need to make any down payment as well for it!

[carboy]

Originally Posted by RVD

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.

Where do you think I am coming from? I have lots of money invested in the market. Not just equity mutual funds but lot of stocks also. And I do a lot of ground work also. My first investment in stocks was in 1994. I also have real estate investments.

Originally Posted by RVD

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.

You wrote the below quoted stuff in your first post

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)

The above is absolutely wrong. The calculation is actually very simple. If you take a loan at 11% and you loan the bank money at 9%, you do lose.

And about 'living beyond your means' - there are 2 things
1) Take a loan because you don't have money to buy the car - this is the textbook definition of living beyond your means. I am not saying that it's wrong to live beyond your means. All I am saying is don't say you are not living beyond your means.

2) Take a loan inspite of having money to buy the car - I have nothing against people who do this. However, I won't do this - because I don't think this is financially the right thing for me. I consider this simple thing - very few people have all their money in equity - most people have some money in FDs or debt. So if the total money is I have is Rs 1 Lakh (just an example figure) & I have decided that I will have a split of 50-50 (i.e. 50000 in equity and 50000 in FDs/debt instruments - again I have used an arbitrary figure of 50-50). Now if I need to buy a something worth 50,000 Rs. I will liquidate all my fds/debt instruments & buy the item with the 50,000 Rs. When comparing this with taking a loan of Rs. 50000 at 12% interest, I will consider that I have 50000 in FD earning me a 12% interest.

[murillo]

I have voted for purchasing on outright basis. The below are my personal opinions from a salaried person's viewpoint.

It is simple for me to decide. If someone is lending me his money, why would he do that? I am sure he is not doing any charity to me. In fact, he is lending money because he can benefit himself at my expense. And I don't want him to benefit at my expense.

I think, it is the idea of paying a lump sum amount like Rs. 5-6 lac in one go that people find unacceptable. Instead, they want to keep it - so they try to find some rationale for keeping it and think of ways of how they can better utilize it. OTOH, paying an amount like Rs. 15,000 as emi every month sounds comforting but won't face up to the fact that it is the more costly option.

One can take a loan for an appreciating asset, like home as it also gives tax breaks. One should not get a loan for buying a depreciating asset.

I believe numbers alone is not everything; there is also a human element inherent in these decisions. Some people, esp. salaried, value things like peace of mind, hassle-free life, etc. For example, if I am going for a loan to buy a car, I also think about the overheads that come with it:
1. I have to approach the bank and do the paperwork.
2. Even if I accidentally miss an emi, it will affect my credit score
3. My RC will have hypothecation
4. When giving loan and selling a car, the bank and dealer will do everything for you making it ever so easy. However, when you have completed your loan, you have to run around to bank for noc and other paper work. Also, run around RTO a couple of days to remove the hypothecation
5. If I want to sell the car midway to someone or a used dealer, I have to do paperwork for the loan part also
6. There may be additional costs involved when you part pay or foreclose
7. Interest cost is not the only cost. There may be additional costs like processing fees, RTO hypothecation charges, RTO hypothecation removal charges, credit life insurance cost, giving up on other offers/discounts, etc.
8. If I am on floating rate car loan, then I bear the interest rate risk. The floating rates usually tend to go only up
9. You lose the bragging rights on the car as technically it is not your car until you pay up that last rupee to the bank

[infotech58]

Voted for Outright; but that's just me.

Reasons:
1) I do not think buying a new car makes much sense for a salaried professional; for a businessmen - a new car can be written off as an expense but for a salaried professional, it is just a depreciating asset.

2) Today, when most families are double income, it is not very difficult to save up ample cash for an outright purchase (at least for an entry level sedan, hatch) in 10-12 months.

3) No EMI, means one less thing to worry about every month.

[devsoftech]

Originally Posted by infotech58

Voted for Outright; but that's just me.

2) Today, when most families are double income, it is not very difficult to save up ample cash for an outright purchase (at least for an entry level sedan, hatch) in 10-12 months.

3) No EMI, means one less thing to worry about every month.

In my case, wife said she won't give a penny, she will continue using office transport and advised me to do so or commute on a 2 wheeler
Double income at times does not give you a guarantee that you will get contribution from your better half. Moresoever, when you have a webpage with black ground open on your PC.
Agreed, EMI keeps me competitive and pressurized. Being laid-off from different job two times in my 10 years of job, I did have second thoughts about selling my prized possession/breaking FD's for the next EMI. But then I look at my love and start reading books and clear the interview. When an EMI is over, there's also a false feeling that I've got extra hike in salary every month. I'm the most impractical guy and banks have been supporting their employees due to my generous contribution

[soonya]

An interesting thread, which I have been following assiduously and am reminded of the journey in discovering my financial follies and foibles!

My first bike 2.5 decades ago bought by saving every penny (chits et al.) and a small hand loan from a relative. I keep it even today as a matter of pride (to keep it alive, my wife's driver uses it).

All my first cars were bought on cash (pre-owned). And midway I changed my philosophy as the fin folks from my company suggested (company lease better argument) but the happiness did not last long as company car lease scheme was brought into tax bracket as perk by Mr. Chidambaram in his first FM avatar.

I bought a family beater car (pre-owned) on cash. But a banker friend (PSU)of mine exhorted me to buy my personal car on a loan (he gave a 7 year term, and the best rates possible then) - however since there were no pre-payment charges, had paid more at every EMI and closed the loan 1.2 years ahead of time. Am I peaceful, you bet!

I'd agree with Carboy about living within one's means. But the market and choice induced aspirations are a difficult thing to deal with, with a philosophy of live now pay later!

I also took (had to face severe stigma from wife, and my direct reportees) a view that I should always buy a car a state lower than what I think I can afford (even with an EMI) so that I can maintain my car 'factory fresh' all the time. Have seen colleagues buy expensive cars but flinch at maintaining it. I believe while there is a status value for a car, it also can be a potential death trap if not taken care of properly.

I used to be a credit card revolver (out of sheer indifference and probably stubborn ignorance) till my CFO asked me if I would like to borrow on compounding interest of 3.75 or 4 percent. I looked at him with disdain and told him I may not be financially savvy but I am no idiot. He gently told me revolving credit is exactly like borrowing from an 'evil usurer' (like Shankar Balan said). How stupid could I be? Since then I always pay my CC bills (rounding off to a higher value). Interestingly the CC company never increased my credit limit after that I have had to call them to increase the limit if I were to travel abroad!

While I do love automobiles (not a tech guy) and everything to do with automobiles I'd rather not become a slave to a bank and be conditioned by the EMI's! After all it is a pile of silicon, metal and rubber! This is my personal view, no offense meant to any other.

I realized there is no limit to the 'desirability' of autos, the moment I thought I bought one beauty, the market in a few years offers another 'desirable' one, to add to my woes. But then such is life!

Once one of my students who became a banker told me 'sir you think too much, a car is a heart thing, if you like something you should buy one'! It has always been a struggle between my rationality and reining in the boundaries of my 'irrationality', kya kare?

But my wife is amazed at my risk-taking abilities where my other investments are concerned, and thinks I am schizophrenic!

Looks like most of us are caught in multiple punctuated irrationalities!

I do see there is lot of sage advice on this thread - both for living life with zest, and being cautious for the rainy day. I guess each of us falls at different ends of the spectrum. To each his own.

I was about to go for EMI to buy a new car (for family). But after reading this thread I changed my view.

I must also thank GTO for his comments on 'length of ownership' of a car (on a different thread) and just went ahead to repair than sell/exchange a 9 year, 105K run Corolla (the family beater) and postponed the new-buy. Interestingly both my wife and son endorsed my decision (a rare thing)!

Apologies for the long post mates!

[msmatic]

Originally Posted by carboy

2) Take a loan inspite of having money to buy the car - I have nothing against people who do this. However, I won't do this - because I don't think this is financially the right thing for me. I consider this simple thing - very few people have all their money in equity - most people have some money in FDs or debt. So if the total money is I have is Rs 1 Lakh (just an example figure) & I have decided that I will have a split of 50-50 (i.e. 50000 in equity and 50000 in FDs/debt instruments - again I have used an arbitrary figure of 50-50). Now if I need to buy a something worth 50,000 Rs. I will liquidate all my fds/debt instruments & buy the item with the 50,000 Rs. When comparing this with taking a loan of Rs. 50000 at 12% interest, I will consider that I have 50000 in FD earning me a 12% interest.

The mathematics may be correct but what abt the risk involved? For a salaried person putting down the entire amount of the car would mean taking out almost all/considerable chunk of the savings. What if the salary stops coming in after a few months for whatever reason, how will the car run? and if it comes to a distress sale scenario, the losses are going to be huge. Purely from the operating expenses part of the car it would make financial sense to have some funds in hand to run the car, say for 1 yr without salary income. This is possible only when taken on loan unless the salaried person has won a jackpot!

[radek]

Originally Posted by carboy

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.


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

Carboy, I can't fault your calculations in terms if return earned, but I find it difficult to implement for an avearage person because of amount money required to make it work.

In your illustration, you have assumed that after paying 4,90,000, one is again investing EMI equivalent amount in RD. So basically, total funds required is of 4,90,000 + [15676*36] over 3 years. If one goes for loan, it just needs [15676*3].

Probably, I am not comparing apples to apples.

My other confusion is for my own case is -should we use money earmarked for long term goal to make outright perchase of car rather than going for loan?

Next year I want to buy car worth 10 Lakhs. I do not have that much money in short term investments (Saving account, FD, Liquid funds etc). But I do have much more money in long term target portfolios (Retirement, Child education etc). This money is fully invested Mutual Fund, Stock, Gold ETF and Real Estate.

Now question is, should I disturb this portfolio to make it outright purchase or should I use combination of liquid money I have plus loan? Somone from Finance once said to me that you should not finance long term asset with short term moeny or short term asset with long term money. Though this was said in perspective of company finances, this may apply to an individual also.

I have not voted, as I am really confused between these two options.

[sameerpb]

I have voted for LOAN, My point of view is 50% down payment and 50% loan. This would enable me to leverage the current and future cash flows. But given a choice I would prefer to get rid of loan as soon as possible.

[carboy]

Originally Posted by radek

In your illustration, you have assumed that after paying 4,90,000, one is again investing EMI equivalent amount in RD. So basically, total funds required is of 4,90,000 + [15676*36] over 3 years. If one goes for loan, it just needs [15676*3].

I assume you mean [15676 * 36] & not [15676 * 3].

The illustration was not meant to prove outright better than loan. It was proving something else - if you check the thread and the previous posts, I replied to - you will be able to figure out what it was meant to prove/disprove.


My calculations compare the case where you do have the money but you put in a FD paying 9% & then you take a loan at 11% for buying a car. It's a silly meaningless case which should not have needed an illustration to disprove - but people said you actually come out ahead if you do this - the illustration was meant to disprove this and it did.

[radek]

Originally Posted by carboy

I assume you mean [15676 * 36] & not [15676 * 3].

You are right, that was a typo. It should be 36 months. Any view on my rest of the query?

[arindambasu13]

Voted for outright purchase. Nothing to beat the peace of mind, especially when you have other EMIs (house loan) etc to pay off.

[smokie]

Originally Posted by msmatic

The mathematics may be correct but what abt the risk involved? For a salaried person putting down the entire amount of the car would mean taking out almost all/considerable chunk of the savings. What if the salary stops coming in after a few months for whatever reason, how will the car run? and if it comes to a distress sale scenario, the losses are going to be huge. Purely from the operating expenses part of the car it would make financial sense to have some funds in hand to run the car, say for 1 yr without salary income. This is possible only when taken on loan unless the salaried person has won a jackpot!

How will you pay EMI without salary?

IMHO, if you already have a car, outright purchase makes sense. Live within your means and buy only when you can easily afford it, i.e. For a 10L car, you have 15L-20L savings. Till then use the old car.

If you don't have any car, loan makes sense. Because you are losing out on the experience, which you can't get back. The random road trips, etc. etc. can't be measured solely in financial terms.

[carboy]

Originally Posted by radek

Any view on my rest of the query?

I don't think I am really qualified to give a reply to this kind of detailed financial query - but this is what I would have done

1) Figure out what %age of my long time investment is in debt instruments (FD, PPF, debt funds, hybrid funds etc) - This part I would surely sell off without a second thought to pay for the car. (unless it's something like PPF where the time limit has not yet been reached and can't be easily liquidated).

2) The remaining part of long time investments really needs to be looked at case by case basis. I would have gone down and liquidated stuff which would have not resulted in losses because of liquidation.

But in the first place, buying a car wouldn't have been an unexpected expense for me. I would have probably invested in long term investments only after planning for the car expense, so I am not really 100% sure how I would have reacted to it.

Again, I have no professional financial background whatsoever. So please do your due diligence.

[msmatic]

Originally Posted by smokie

How will you pay EMI without salary?

IMHO, if you already have a car, outright purchase makes sense. Live within your means and buy only when you can easily afford it, i.e. For a 10L car, you have 15L-20L savings. Till then use the old car.

If you don't have any car, loan makes sense. Because you are losing out on the experience, which you can't get back. The random road trips, etc. etc. can't be measured solely in financial terms.

In the context of this thread it is assumed that a salaried person has savings of 10L, and the monthly salary takes care of all other commitments, and is looking to buy a car costing 10L. Now if he liquidates his entire savings, and the salary stops then he is in a spot of bother. He cannot run the car nor take care of other commitments.

Suppose he takes a loan of 5L, keeps the remaining 5L in an FD or any other secure financial instrument, and pays the EMI from salary, then even if salary stops, he can utilise the saved amount to continue paying EMI, run the car and take care of other commitments as well. Yes, this will last till the savings are exhausted, but it will buy him some time for arranging funds from alternative sources while still being able to continue leading his normal life all the time.

Think of it as a simple cash flow in a company. If a company invests all its money in buying new machinery and production of goods, and suddenly the demand goes down and the company cannot generate enough cash flows to stay afloat, then it runs the risk of losing the employees and machinery as borrowing at this time may be difficult or available at very high rates.

Instead of investing all its cash, if the company had taken a loan, then even if there was no demand or cash inflow, the company could have paid monthly salaries and monthly/yearly dues to the financial institutions and kept the company afloat easily.

The banks or financial institutions help mitigate the risk involved, for which they charge a fee called interest.