[Pancham]

Originally Posted by carboy

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.

Haha you are right. The basic principle says this. It becomes a fight when you have money in your pocket and still think of going in for a loan or outright. It is a completely separate debate when you dont have the money. Then comes the "listening to heart" part.
A few pointers:

1) You have money and you are toying between the idea of loan or cash down

Unless you are absolutely sure you can have a return more than your outflow go for cash down. As mentioned lending rate will always be more than investing rate.

2) You dont have adequate cash or the cash is locked up or there are some other commitments but still want to go for that dream car of yours.

Just make sure that the EMI amount is within the safe zone. You have to decide what your safe zone is. Whatever you are comfortable with.

We are all car lovers and car loans do look delicious. It is not a crime if you go for car loans. It only depends on your current status and financial condition. There is no absolute answer to this. So please do you math and that too correctly.

P.S: Lastly I would like to mention friends please carry out the calculations correctly. PLease be technically correct while calculation. There are a few factors like time value of money which needs to be considered. Cheers

[abeerbagul]

I guess carboy is giving a mathematical answer to an emotional question. This happens all the time on real estate forums.

The primal need of people who have 3L cash but still take a 3L loan is not to earn a profit on the interest difference. The need is to keep the 3L in hand "just in case" something happens, to provide cash flow.

Examples of "just in case"s:
1. You need to put a downpayment for a flat.
2. You may loose your job in the near future, you need spending money to get you through for six months at least.
3. Any other examples I didnt think of?

Now when you feel the need for cash in hand for situations such as the above, the best way is to think through both issues (i.e. car vs. need for cash) very carefully.
In such a case, if the car is going to provide a need for basic safe transport, you should keep the cash and take a loan. If the car is just a want or an upgrade, you should wait till your cash situation becomes better and you can pay lumpsum.

Now if someone has an investment avenue where the 3L cash will give guaranteed return greater than loan interest, then definitely car loan makes sense. But if the debate is between car loan and bank fixed deposit, I guess car loan is not a good choice.

[carboy]

Originally Posted by abeerbagul

I guess carboy is giving a mathematical answer to an emotional question. This happens all the time on real estate forums.

The primal need of people who have 3L cash but still take a 3L loan is not to earn a profit on the interest difference. The need is to keep the 3L in hand "just in case" something happens, to provide cash flow.

I fully understand this. I don't say don't do it. Different people have different attitudes towards finance. And there is nothing wrong with it.

The only problem is people insisting that mathematically they are earning a profit doing this. These are the same people who think taking a money back life insurance policy (whole life insurance) is more profitable than taking a non-money back life insurance policy (term life insurance policy) just because you are getting money back in the first case.

[Pancham]

Originally Posted by abeerbagul

I guess carboy is giving a mathematical answer to an emotional question. This happens all the time on real estate forums.

The primal need of people who have 3L cash but still take a 3L loan is not to earn a profit on the interest difference. The need is to keep the 3L in hand "just in case" something happens, to provide cash flow.

I completely agree with this. But then again some people may say it is not wise to buy a 3L car if you just have 3L cash. I still agree with your point. Imagine wanting to own a BMW from your childhood and then plonking in 35L cash for the car. Not my cup of tea.

[NetfreakBombay]

Originally Posted by carboy

You also loan 3 Lakhs to the bank and they pay you 8.25% interest on it.

But you are still making a profit. If this was actually possible, I would do this every morning and not even buy a car.

Every morning at 8:30 am when the bank opens, I will borrow 3 lakhs from them at 12% interest. I am not planning to buy a car, so I will go back at 9:30 am, I will lend them back 3 Lakhs at 8.25% interest.

And I will make a profit out of it.

And I will make merry for the rest of day (I no longer need to work - so I quit my day job).

This is absolutely correct.

If:

1. You credit rating is so good that banks are willing to give "unsecured" loans for 12%
2. You can wait for 5 years for "Profits" to be in your hands
3. You can get large amount of such loans (Every loan is registered in CIBIL and impacts next loan)


Then, you need not work for rest of your life.

[carboy]

Originally Posted by NetfreakBombay

2. You can wait for 5 years for "Profits" to be in your hands

Since I am doing it every day, I would have received my profit from a similar loan taken that day 5 years ago. I quit my job only after the first of the profits start rolling in.

[poloman]

I am a salaried professional and I had done an outright purchase around 2.5 years back. Though I am not getting in to the mathematics of the pros and cons. I am sure I won't do it again. The reasons.
1) This depleted my savings over a long period of time, overnight and I was treading close to disaster, had something happened to my job.
2) Car loans are comparitively easy to obtain and come with relatively less interest rate. I realised this when I wanted to purchase a plot in my native place. Loans were hard to come by and I had to go for personal loan at 15%. Where as I could have got a car loan even under 10%.The savings spent on car could have been utilized to achieve a better quality asset at a lower cost. So buying car outright was a good decision at that point of time but turned out bad at a later point. What gave some relief to me was a hypothecation free RC book. But does that really matter?

Then I realized you should maintain a healthy balance between savings and loans at all points in your life. Some people for some reason dislike emis and never take loans. But I strongly feel you should utilize cheaper loan options and spare your liquid savings deplete to dangeroulsy low levels.

[NetfreakBombay]

Originally Posted by carboy

Since I am doing it every day, I would have received my profit from a similar loan taken that day 5 years ago. I quit my job only after the first of the profits start rolling in.

Correct, as long as bank keeps giving you a new "unsecured" loan every day.

*CIBIL*

[Prodigyy]

Originally Posted by carboy

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.

Yes you do end up with a car and 5 Lakh rupees in option 2 & you do end up with Rs. 50K less in option 1, but this is ONLY in the case of an FD, i was just quoting an example to you based on a simple tax saving FD. You too are taking into account the compounding effect to the get to the figure of Rs. 5L for your returns.

You too are investing Rs. 4L over 5 years to get a return of Rs. 5L, i am investing Rs. 3L upfront to get a return of Rs. 4.5L and pay Rs. 4L to the bank for repayment of loan.

I guess you would acknowledge the fact that there are better ways to invest your money than in an FD, where the returns would be greater than 8.25% add compounding to that and you would easily have returns to the tune of 11-12% p.a. (CAGR). The loan repayment works on the principle of interest on the daily decreasing outstanding principle. Effective interest rate turns out to be a tad lower than 12%. Again loans considering the ROI as 12% is very high IMO, usually car loans can be got at 10.5-11% giving an effective ROI lower than 10% p.a. on the repayments made by one.

I guess no amount of calculations on my / others end would convince you and neither should we be convincing you on this. Likewise, no amount of calculations would convince me. I know what works for me, and i firm and trust my beliefs and i know they are true. Same ways, i am pretty sure that you too are sure of your beliefs, so lets just leave it at that

Originally Posted by Pancham

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.

Rs. 6749 invested for 60 months turns out to be Rs. 4L, thats how i come out with Rs. 400000

[alpha1]

I don't believe it!
People here are suggesting that you can make money by taking a loan at higher interest rate and depositing that money at lower interest rate ??? !!!

Or is it that they are suggesting that after taking the loan, the cash in hand can be used to generate revenue - like an investment - and the rate of return from such investment is easily higher than the loan interest rate that you've taken from the bank.

In such case, yes, it does make sense. In fact what you have done in such case is = used bank's loan money to create high rate of return revenue.



Also please note reducing balance, reducing interest etc all are pseudo technical terms invented by the bankers and money lenders. Interest = always compound interest on remaining balance unless and until specified otherwise.

[rejoycjohn]

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.

Really interesting statements. But then I thought I should try to find how well these statements connect to reality. If it does then its a pretty good suggestion that I can make to my family and friends when they plan to buy a car.

To explain let me create a scenario. Person A and Person B have 6 lakhs with them. Both of them are married, they work in the IT hub of India and they travel 20 Km up and down for work. Their native is in another state and its almost 350 Km from their work place and they go to their native at least once in a month. They also travel at least 6 times in a year to attend marriages and other family functions. If we tabulate the cost that they incur every month for travel it comes around 10800.
They use autos to commute within the city as the bus stop is quite far and taking an auto is much comfortable than Bus. They take Volvo / Benz to their hometown as it offers better comfort. The detailed break up of travel cost per month is mentioned below. ( at the end of this post )

Case 1
Now Person A decides to buy a car but keep 6 Lakhs in FD for a period of 7 years @ SBI Bank
(8.25% Quarterly compounding interest).
To fund the car he opts for a car loan of 6 Lakhs from SBI (10.75%) for tenure of 7 years.

Person B keeps his 6 Lakh in FD but continue to use the public transport system.

Mentioned below is what will happen after 7 years.
Person A
Cost of the car + running it for 7 years 1337420
Income from FD after 7 years 1081080
He sells his car after 7 years @ 250000 so that he can buy the next generation car
Net cost that he incurred in the whole process INR 6340

Person B
His monthly travel expense summed up after 7 years 907200
His income from FD after 7 years 1081080
Profit after 7 years 173880

Summary
Person A with a car lost 173880 + 6340 = 180220 INR over a period of 7 years.
ie 2145 / month ; Not a very big amount in my opinion.

Case 2:-
Person A does the same thing as he did in Case 1 and hence the cost that he incurred in the whole process is still 6340

Person B understood that he should buy a car but he didn’t want to buy with any EMI and hence he buys the car outright for 6 Lakhs
His cost / month for doing his commute 15921 – 10150 = 5771
His cost after 7 years for his commute = 484820
His cost of car + cost of running the car after 7 years = 1084820
He sells his car @2.5 Lakhs ; and hence total cost a whopping 578460 !!

( All the calculation for FD and Car loans are taken from SBI website and hence the rates and the returns are not imaginary )

Summary
Even if you have the whole money in the world, don’t spend it on an outright purchase of car; rather invest it in atleast a FD and minimize the cost that you are incurring.

Actually this is kind of an eye opener for me. Even if I have 6 lakhs with me in liquid cash , it doesn’t make any financial sense to put the whole amount in buying a car ( which is a depreciating asset ) rather put that in FD or some kind of investment and then take a loan from a bank and then buy the car.

Most importantly, buy a car only in case you travel and not as a showpiece if you are really worried about the cost of that car parked idle in your garage for years.

[rejoycjohn]

Person B understood that he should buy a car but he didn’t want to buy with any EMI and hence he buys the car outright for 6 Lakhs
His cost / month for doing his commute 15921 – 10150 = 5771
His cost after 7 years for his commute = 484820
His cost of car + cost of running the car after 7 years = 1084820
He sells his car @2.5 Lakhs ; and hence total cost a whopping 578460 !!

Adding one more line item ;
Interest that he saves in 7 years had he taken the Car Loan from SBI = 256360
So the net cost to him 1084820 - 250000 - 256360 = 578460
Just added so that the calculation is clear.
Sorry , was not able to edit my previous post by the time I noticed this.

[sandeepmohan]

Voted "Outright". Just can't stand a car loan or any loan for that matter.

I could not buy my first new car as an outright purchase simply because I did not have liquid cash. I could have broken in to my investments which would have funded the car easily but that would have been just stupid to do and is not something I would wanna break to go buy a car.

However; my wife and I did manage to put down 40% of cash towards our new car in less than a year by saving really hard. Luxuries were kept aside. We thought of waiting more so we could save even more and put down a higher down payment but that would mean no car in the household which is something we could not manage even for 3 months after getting used to our first car which was a used one.

In fact, we are planning to do this whole saving exercise all over again to buy a small car for my wife and this time around, no loan.

[msmatic]

Originally Posted by rejoycjohn

Adding one more line item ;
Interest that he saves in 7 years had he taken the Car Loan from SBI = 256360
So the net cost to him 1084820 - 250000 - 256360 = 578460
Just added so that the calculation is clear.
Sorry , was not able to edit my previous post by the time I noticed this.

If person B, after buying the car outright, went ahead and invested the saved EMI amount of Rs 10150 every month in an RD, of 8.25% for 7 yrs, he would have earned Rs 1154142.

Hence Person B would still have Rs 575682 left over, after all expenses as per your calculations.


Think about it this way, Person A locks in his money(6L) for 7 years in FD, makes EMI Payment of Rs10150 every month for 7 years, and at the end makes a loss of Rs6340 after selling the car.

PersonB locks in his money (6L) forever, buys the car outright, invests EMI amount of Rs10150 every month in an RD for 7 years, and at the end makes a profit of Rs 575682 after selling the car.

Now which one is better/smarter ??

[Prodigyy]

Originally Posted by alpha1

I don't believe it!
Also please note reducing balance, reducing interest etc all are pseudo technical terms invented by the bankers and money lenders. Interest = always compound interest on remaining balance unless and until specified otherwise.

Reducing balance is actually true and the effective interest rate comes out to be lower than what is quoted.

For example, if someone takes a loan at 12% on reducing balance of Rs. 300000, then the EMI calculated comes out to be Rs. 6673.33 (calculated from SBI EMI calculator). Considering Rs. 6674 for 60 months total amount paid is Rs. 400440 thus the total interest amounts to Rs. 100440.

100440 interest on a loan of Rs. 300000 calculates to a total interest of 33.48% over a period of 5 years. Effective Interest rate can easily be calculated with this.

Though, all said, most banks even though they do lend on reducing balance, but many banks charge a whole lot of OTHER charges which are not charged by Public Sector banks.