[carboy]

Originally Posted by Prodigyy

The reason for this is pretty simple, the amount invested keeps compounding, whereas the loan taken works on a decreasing balance principle.

This is true without being relevant. This exact same statement was made by someone else in this thread and was countered. Check back a couple of pages.

Originally Posted by Prodigyy

Hence the difference on the amount you make by investing a certain sum of money for 5 years.

If this is possible - please go ahead and do what I suggest. Take loans in the morning, do not buy a car and make FDs in the afternoon on the same amount. If you are making a profit, I am willing to pay any taxes which are incurred on your profit/interest.

[msmatic]

Originally Posted by abeerbagul

If a person has a lifetime savings of 10L and he is still looking to buy a car of 10L, he has some habit of living on the edge!

A salaried person having savings of 10L doesn't deserve a 10L Rupee Car ? What sort of logic is this ?
All I'm saying is if you use all/most of your savings upfront in buying a car, then if you might be in trouble if your salary stops. If you take a loan for some amount and maintain liquidity, then you can tide over any situation with minimum hassles.

[shankar.balan]

This topic is highly subjective. In matters of the heart and financial sense and priorities there can never be a 'one size fits all' policy. I would suggest that all who participate in this thread keep this in mind. Also, if anyone has an interesting and valuable theory, do try and quantify it by putting out an excel working! That will help a great deal!

[Prodigyy]

Originally Posted by carboy

If this is possible - please go ahead and do what I suggest. Take loans in the morning, do not buy a car and make FDs in the afternoon on the same amount. If you are making a profit, I am willing to pay any taxes which are incurred on your profit/interest.

Again ill only say that the point raised above of compounding comes into effect when it stays put for a period of 5 yrs or more. It does not work like a morning an and afternoon thing. If you really can not see the whole point of compounding of investments and decreasing loan amount then i guess there isn't really too much to discuss or explain. Its simple mathematics.

All i know is it has worked for me and i have all reasons to believe that it would continue to do so in future too. And my organisation actually pays me a hefty sum every month to do this for them actually. Again point to note is i am not necessarily pointing towards FD.

[carboy]

Originally Posted by Prodigyy

Again ill only say that the point raised above of compounding comes into effect when it stays put for a period of 5 yrs or more. It does not work like a morning an and afternoon thing.

I am not saying you take a loan in the morning and pay it back by afternoon.
My example was for taking a 5 year loan and also a 5 year FD.
Only thing you do it everyday. Or alternate days or once a week depending on how much profit you want to make.

Or just do it once.
Take a loan from the bank for 3 Lakhs at 12% for 5 years. Take the same 3 lakh to a different bank and make an FD at 8.25% for 5 years.
Do you think you will have a profit at the end of 5 years?

Originally Posted by Prodigyy

If you really can not see the whole point of compounding of investments and decreasing loan amount then i guess there isn't really too much to discuss or explain. Its simple mathematics.

Yes. It's very simple mathematics. But since you have missed one factor, it's incomplete mathematics.

You think you have a profit because you have forgotten to compound the EMIs you have saved. Once you take that into account - you will not longer see a profit, but instead see the interest cost. If you want, I can take your figures and factor this and present the calculations. I have already done it couple of times earlier in this thread for others who insisted that compounding and reducing balance put together conjure money out of thin air.

[Warwithwheels]

Originally Posted by Prodigyy

....If you really can not see the whole point of compounding of investments and decreasing loan amount then i guess there isn't really too much to discuss or explain. Its simple mathematics.

Well said mate.

Originally Posted by carboy

Take a loan from the bank for 3 Lakhs at 12% for 5 years. Take the same 3 lakh to a different bank and make an FD at 8.25% for 5 years.

Why the hell should I borrow at 12% when SBI is ready to lend at 10.50%? And why should I invest at 8.25% when ICICI can pay me 8.75% or even 9% (Senior Citizens scheme) on my deposits.

Heck, even if I take a loan at 12.50% I still stand to make a decent profit of about 60,000 in the bargain (which is quite a lotta money for a major chunk of the salaried folks)

Investing 3.00 Lacs at 8.25% for 5 years would lend the following:




Borrowing 3.00 Lacs at 12.50% for 5 years costs:




You do the math and decide on whether it is profitable or not. Even if you incorporate the maximum marginal rate of tax @ 30% you are still left with a positive number. Invoke the concept of Time Value of Money, and the results would look even more interesting!!!

[carboy]

Originally Posted by Warwithwheels

Why the hell should I borrow at 12% when SBI is ready to lend at 10.50%? And why should I invest at 8.25% when ICICI can pay me 8.75% or even 9% (Senior Citizens scheme) on my deposits.

I didn't make up those numbers. Those were rates given by Prodigyy in his calculations which showed a profit.

Originally Posted by Warwithwheels

Heck, even if I take a loan at 12.50% I still stand to make a decent profit of about 60,000 in the bargain (which is quite a lotta money for a major chunk of the salaried folks)

Investing 3.00 Lacs at 8.25% for 5 years would lend the following:

Borrowing 3.00 Lacs at 12.50% for 5 years costs:

You do the math and decide on whether it is profitable or not.

I did the math. I didn't make a profit. You did because you ignored the compounding of the EMI you did not have to pay.

Let me do it once more in this thread. For the last and final time.

You have 3 Lakhs with you. Now you have 2 options
1) Option 1.

You take a loan of 3 Lakhs from a bank at 12.5% for 5 years and invest your own 3 Lakh at 8.25% for 5 years.

At the end of the 5 years, you have Rs. 4,51,279 and a 5 year old car.

2) Option 2
You don't take a loan or a FD. You pay 3 Lakhs and buy a car. This means you don't have to pay an EMI of Rs 6,749. So you put this 6749 in a recurring deposit every month at 8.25% for 5 years. At the end of the 5 years your recurring deposit has compounded to Rs. 5,01,829.

At the end of the 5 years, you have Rs. 5,01,829 and a 5 year old car.

Now tell me did you make a profit?

You and Prodigyy (and some others I have replied to earlier in this thread are all ignoring the compounding of the EMI you pay every month). You don't have to pay this EMI in option 2. You are not going to stuff it into your mattress every month and take it out at the end of 5 years. You should compound it again in a Recurring deposit to account for it.

Please tell me the fallacy in my calculations.
If you want take the bank loan rate as 10.25% & take the FD interest as 9.25%. Even then you will not make a profit. You will always have an interest cost.

I am not going to make any more effort in making people understand this. People who think they will make a profit may also be confused by the puzzle below.

Three ladies go to a restaurant for a meal. They receive a bill for $30. They each put $10 on the table, which the waiter collects and takes to the till. The cashier informs the waiter that the bill should only have been for $25 and returns $5 to the waiter in $1 coins. On the way back to the table the waiter realizes that he cannot divide the coins equally between the ladies. As they didn’t know the total of the revised bill, he decides to put $2 in his own pocket and give each of the ladies $1.
Now that each lady has been given a dollar back, each of the ladies has paid $9. Three times 9 is 27. The waiter has $2 in his pocket. Two plus 27 is $29. The ladies originally handed over $30. Where is the missing dollar?

[Prodigyy]

Originally Posted by carboy

1) Option 1.

You take a loan of 3 Lakhs from a bank at 12.5% for 5 years and invest your own 3 Lakh at 8.25% for 5 years.

At the end of the 5 years, you have Rs. 4,51,279 and a 5 year old car.

2) Option 2
You don't take a loan or a FD. You pay 3 Lakhs and buy a car. This means you don't have to pay an EMI of Rs 6,749. So you put this 6749 in a recurring deposit every month at 8.25% for 5 years. At the end of the 5 years your recurring deposit has compounded to Rs. 5,01,829.

At the end of the 5 years, you have Rs. 5,01,829 and a 5 year old car.

Please tell me the fallacy in my calculations.

As per option 2 you have invested 6749 for 60 months that is more than Rs. 400000 over the 5 years to end up with Rs. 500000 odd earning an amount of around a lakh rupees and a 5 yr old car. So you eventually end up paying Rs. 3 lakhs upfront plus Rs. 4 lakhs and end up with Rs. 5 lakhs.

In option 1 you pay Rs. 3 lakhs upfront to earn Rs. 4.5 lakhs, also you pay rs. 6749 for 5 years each month as an EMI. And you have to keep in mind that Rs. 6749 in month 60 would feel like a lot less since in those 5 yrs the salary is assumed to go up.

I will not go for the value of money aspect here, but i guess everyone knows that 3 lakhs today does not carry a value of Rs. 3 lakhs after 5 years.

[Pancham]

I have been following this thread. Although I hate loans and any kind of burdens but I still feel car loans can help you go the extra distance. Iys completely subjective.
However, the debate will go on and on.

Originally Posted by Miel

[*]Cost of car = 5 Lakhs[*]Money in hand = 5 Lakhs[*]Downpayment made = 2 Lakhs[*]Loan taken = 3 Lakhs at 12% fixed rate of interest for 60 months (5 year tenure)[*]What do I do with the 3 Lakhs left in hand? Invest in 3 tax saving FDs of 1 Lakh each (5 year tenure), at 8.25% rate of interest compounded quarterly.[*]At the end of 5 years:
What I paid (i.e. loss) to the bank = 4,00,440.00
What I got (i.e. gain) from my FD (Original sum + Compounded interest) = 4,51,279.17
Which means I made a profit of 50,839.17 [/list]Or am I missing something here? Please advise me.

Originally Posted by Warwithwheels

Well said mate.



Why the hell should I borrow at 12% when SBI is ready to lend at 10.50%? And why should I invest at 8.25% when ICICI can pay me 8.75% or even 9% (Senior Citizens scheme) on my deposits.

Heck, even if I take a loan at 12.50% I still stand to make a decent profit of about 60,000 in the bargain (which is quite a lotta money for a major chunk of the salaried folks)

Investing 3.00 Lacs at 8.25% for 5 years would lend the following:

Attachment 1033713


Borrowing 3.00 Lacs at 12.50% for 5 years costs:

Attachment 1033714


You do the math and decide on whether it is profitable or not. Even if you incorporate the maximum marginal rate of tax @ 30% you are still left with a positive number. Invoke the concept of Time Value of Money, and the results would look even more interesting!!!

I think there is a mistake here. Correct me if I am wrong. You are saying you have paid Rs. 4,00,440.00 to the bank after 5 years. Please remember one thing that the loan repayment is continuous and this is were Time value of Money comes in. This will take this above figure dangerously close or maybe even more than Rs.4,51,279.17. What you earn in FD is at the end of 5 years but what you pay as loan repayment is continuous. I have tried to put this as simply as possible.
What you have to do is take all the EMI starting from 1,2,3,4,5.......,59 and discount it till the end of 60th month. We can never compare Rs.400440 to Rs.451279.17.

[carboy]

Originally Posted by Prodigyy

As per option 2 you have invested 6749 for 60 months that is more than Rs. 400000 over the 5 years to end up with Rs. 500000 odd earning an amount of around a lakh rupees and a 5 yr old car. So you eventually end up paying Rs. 3 lakhs upfront plus Rs. 4 lakhs and end up with Rs. 5 lakhs.

In option 1 you pay Rs. 3 lakhs upfront to earn Rs. 4.5 lakhs, also you pay rs. 6749 for 5 years each month as an EMI.

You start with the same amount of money in both options - 3 Lakhs. You pay out the same money every month in both options. In option 1, you end up with a car & Rs. 4,51,279. In option 2, you end up with a car & 5,01,829.

I am not sure how I can break it down any simpler.

[Pancham]

Originally Posted by Prodigyy

So you eventually end up paying Rs. 3 lakhs upfront plus Rs. 4 lakhs and end up with Rs. 5 lakhs.

No plus Rs. 4 Lakhs here. He has invested the amount and got back Rs.5 Lakhs. Amazing how you found Rs.4 Lakhs here.

@carboy. Since you are paying Rs.3 Lakhs upfront I think you will have to factor that in too and see what it is after 5 years.

[carboy]

Originally Posted by Pancham

@carboy. Since you are paying Rs.3 Lakhs upfront I think you will have to factor that in too and see what it is after 5 years.

It's nothing after 5 years. Zilch, Zero, Zip, Nil, Nada and Null. On day 1, it left my hands and went into the hands of the car dealer. I didn't loan it to the dealer. I got the car in return. So for me, it's 0 in terms of money, then on.

[Pancham]

Originally Posted by carboy

It's nothing after 5 years. Zilch, Zero, Zip, Nil, Nada and Null. On day 1, it left my hands and went into the hands of the car dealer. I didn't loan it to the dealer. I got the car in return. So for me, it's 0 in terms of money, then on.

I am sorry but there is a mistake. Compared to someone who is taking a loan and also has 3 Lakhs in hand. He is actually not losing anything upfront. He is investing that 3 lakhs right? Going by your example he can at the same time invest 6749 in a recurring deposit. Sounds vague right? You have managed to bring out 6749 even after paying 300000 upfront but the person who is taking a loan buys the car and also has 300000 in hand. Then again he has to pay EMI. Please tell me if you are confused.

P.S: I had read somewhere longtime back that in an efficient economy the borrowing rate shall always be more than the investing rate. This obviously not applicable for all returns(eg. speculative items). So I dont see a person taking a loan at 12.5% and then investing it at 8.5% and still earning a profit in the long run. I might be wrong.

[carboy]

Originally Posted by Pancham

I am sorry but there is a mistake. Compared to someone who is taking a loan and also has 3 Lakhs in hand. He is actually not losing anything upfront. He is investing that 3 lakhs right? Going by your example he can at the same time invest 6749 in a recurring deposit.

No, he cannot. Because he has to pay 6749 to the bank as EMI every month.

Originally Posted by Pancham

Sounds vague right? You have managed to bring out 6749 even after paying 300000 upfront but the person who is taking a loan buys the car and also has 300000 in hand.

Yes. He has - I have taken it into account in my calculations - the 3 lakhs invested gives him 4,51,279 at the end of 5 years.

Both people have 3 lakhs at the beginning. Both put that money into something which cannot be touched for 5 years atleast (I am adding the 'atleast' because option 2 guy can never touch it - it's gone for him). If option 1 guy has enough money to pay 6749 every month, then option 2 guy has 6749 left over every month because he doesn't have to pay the EMI - so he puts it into an RD every month.

Originally Posted by Pancham

Then again he has to pay EMI.

Yes, he has to. That's why he cannot put money into a RD.

Originally Posted by Pancham

Please tell me if you are confused.

Absolutely not. I am very clear on this.

Originally Posted by Pancham

So I dont see a person taking a loan at 12.5% and then investing it at 8.5% and still earning a profit in the long run. I might be wrong.

No. You are not wrong. You are absolutely right. I didn't think I would have to prove it - it should be obvious as daylight. But sadly I had to put forth calculations to prove it. And even sadder, people don't believe the calculations. I have written it over and over again in this thread. I have done the calculations a few times on this thread.

You lend bank money at x%. Bank lends you at y%.
y > x
You cannot profit.

This should be blindingly obvious with mid school algebra.

[TaureanBull]

Since the thread is for educative purposes, I will add my knowledge. There are some stubborn people out here as I mentioned here in my previous post. Instead of being stubborn and haggling with people we must try and understand the logic.

So how the person who borrows 3 lakhs at 12% for 5 years makes profit by lending bank an FD for 8.25%? Here is the answer:-

(a) The loan rate is on reducing EMI. The individual is not paying interest on the entire sum of 3 Lakhs for 5 years rather on the reducing principal amount. The loan rate of 12% is known as nominal interest rate. The effective rate of interest will come out to about 7.25%.

(b) The interest on FD is 8.25%. Which is compounded annually. The effective interest rate would be close to 8.5%.

(c) Therefore the difference and hence a profit.

Now, why can n't this be done everyday?

(a) The FD has to be fixed for three years to get these returns. That is why these rates. On daily basis bank rate is about 4%.

(b) The loan for car has to be realised and car hypothecated to the loaning agency.

(c) Conclusion : To get that benefit of investment one has to stay invested in loan/FD for the required tenure.


BTW Miel you missed out that the FD will give you a tax break too!

As it is, everything cannt be measured in profit making terms. Put your kids in government schools , use bicycles etc are some other measure by which you can save lot of money and accumulate. One has to decide for what, whom and why!

PS :Person who can understand this can just go ahead and not argue here wasting time. Do your calculations. Dont depend on the intellect of others.

OT : (not really) Want to add a joke here.

First person : Cow has two legs!
Second Person : No, it has four. I can show it and prove it to you.
First Person : You cant! Because even if you show me I wont accept that cow has four legs.

(Better heard in the local dialects)