[vjjustin]

Originally Posted by Altocumulus

Even with your interest % example, in both scenarios we are paying an EMI/RD of the same amount. However, in case of a loan you are keeping the 10L with you and in the other case you are giving away that 10L apart from the monthly RD payments. Your outgoing is much higher. You will pay 23,56,516 and have INR 17,94,439 at the end (loss of 5.6L) while by taking a loan I will pay INR 13,56,516 total and have INR 16,05,781 which is a profit of 2.5L. Even if I pay 30% of the interest in tax which 181500 I am still at a profit. Also it is not that your RD wouldn't attract tax. So losses are higher.

No one seemed to reply to this specific point. So let me clarify this. Sorry, If I missed any.

Originally Posted by Altocumulus

while by taking a loan I will pay INR 13,566,516 and have INR 16,05,781 which is a profit of 2.5L

This is wrong. You are not calculating the 10L you are investing as your outflow. Though FD does provide certain liquidity, don't confuse it as cash in hand; it is not - That's cash in bank, not with you. The outflow remains the same (23,56,516) however you do the calculations.

Let me break it you; the sad truth is that no one is making any profit by purchasing a car for personal use. The only money you are making is by investing whatever remaining amount (whether it is cash in hand or future cash flow). If you just take 13,56,516/- into calculations, you end up with zero rupees not 16,05,781/- (and the car - that's what you are paying that money for).

Originally Posted by Altocumulus

Please understand, very few people have crores in their account for whom a 10L or even a 30L spend doesn't matter

I think I understand your sentiment about the difficulty in letting go of the liquidity when paying out of your savings/pocket. How to support any unforeseen emergencies in the future, etc. I agree, not everyone has enough savings to support for emergencies and pay for cars at the same time. This makes perfect sense, emotionally (peace of mind). But don't confuse the benefits - Purely from a mathmatical/financial perspective, you are losing more money than otherwise.

[highway_star]

Originally Posted by Altocumulus

Either ways the excitement and emotions of finally buying that car is what matters.

Indeed that is one thing we can all agree on!

Originally Posted by nd4$pd

This!

Only if you find an investment which gives you a higher rate of REAL return than the interest on the loan. On FDs, once you pay taxes (at your income tax rate) your return will most probably not match the interest portion of the loan.

Only equities and some bonds will.

Equities also carry a risk so I personally would not use a loan to fund equity investments, although there are many who think differently. Funding an FD from a loan is definitely not profitable.

[Hatari]

I have always paid outright cash. My old car has fetched me 1.65 lakhs. I added about 4.6 lakhs to buy my 1 yr old Verna.

Originally Posted by Altocumulus

Fixed Deposit % considered: 8%
If the 10 L is invested for 7 years the compounded value = INR 17,13,824

Why not a SIP at a conservative 11% interest. Thats works out to approx 20.5 lakhs.

[Lobogris]

Originally Posted by Altocumulus

Normally loans are quoted nowadays with reducing interest.

Just did a rough calculation of my loan. The effective 'Flat' interest rate comes to 5.09% which is pretty good I must say.

Now coming to the more interesting part.

If you have the money to buy the car outright, should you buy on loan or cash ?

I am taking the example of my car which is a 2017 Honda City VMT iVtec purchased on loan at 9.1% reducing balance for 84 months (7 years).

Loan Amount: 10 Lakhs
EMI: INR 16149
Total payment in 84 months: INR 13,56,516

Effective yearly interest : (356516/7)= INR 50931 = 5.09%

Fixed Deposit % considered: 8%
If the 10 L is invested for 7 years the compounded value = INR 17,13,824

Net Profit: INR 17,13,824- INR13,56,516= INR 3,57,308

So according to this I would have lost 3.6L if I bought the car outright.

Even if the FD interest is 7% it is still INR2.5L and 6% around INR1.5L

Conclusion: It is better to buy the car on loan even if you have the money to pay in cash. Also the longer the tenure the better.
Whats even better for people like me, I donot need to wait for years to save that kind of a money to buy a better car in cash because if I do so I lose 35%. Ouch!!

Added Intangible Benefits:
1. Liquid Funds available in case of emergency. Sense of security.
2. Better CIBIL score due to good payment record against a 'Secured' Loan

Many esteemed members have already refuted this logic. Here is my input on this:

You are giving the bank a loan (or investing in a fixed deposit) of 10 lakhs for a fixed period of 7 years. Full 10 lakhs is gone for full 7 years. On the car loan side, you are not borrowing the full 10 lakhs for full 7 years. Every month your loan amount goes down as you have to pay the EMI. After one year, the bank is only lending you approx, 8 lakhs. After 2 years, they are lending you just 6 lakhs and after 5 years, nothing at all. That is why you are paying less than what you get on your fixed depsit. That deposit is 10 lakhs lent for 7 years while the loan is 10 lakhs borrowed for 1 month, then 8 lakhs borrowed after 1 year and so on. I hope you can understand this logic now.

In addition, you would end up paying taxes on any interest gained from the FD which will further reduce your earnings. If you took the EMI payment every month and deposited it in some sort of recurring deposit, then you can calculate what your total gain or loss would be. You are ignoring the monthly EMI payment you have make- these are additional funds being invested that you are overlooking.

[Sawyer]

I think that enough has been demonstrated; more would need in person tuitions. Which is the reason for my advice a long time ago to engage the services of a competent financial advisor to assist in making of sound future plans to live by. A car cannot do more for that then get one from point A to point B on a map.

[GTO]

Interesting article on a trend that I hope never comes to India. Canadians are increasingly opting for 2 EMI payments a month, some even paying an EMI every week!

"Because long-term car loans tend to involve lower monthly or bi-weekly payments, extended terms can encourage consumers to buy more car than they may be able to afford," said Kathryn Dunn, a spokeswoman for the Financial Consumer Agency of Canada

Some borrowers are opting to pay even more frequently with four percent making payments each week during the first half of 2017, up from 3.4 percent in 2015, the J.D. Power data show. "These terms don't allow you to pay off the car any faster, so it's questionable why it is being taken-up by customers," Karwel said. "We feel it has to do with the amount of stress the family budget is under."

Consumer appetite for weekly payments has been fueled by advertisements which tout smaller amounts that are paid in more frequent installments, said George Iny, director of the Automobile Protection Association, a Canadian consumer advocacy group.

Full Reuters Article

[arjithin]

Originally Posted by GTO

Interesting article on a trend that I hope never comes to India. Canadians are increasingly opting for 2 EMI payments a month, some even paying an EMI every week]

One aspect to consider is that salary is paid every two weeks or some times weekly unlike in india where paycheck is mostly monthly. So a smaller EMI right after the paycheck makes less burdon on family budget than a big amount every month.

Quote from article

More than half of Canadians who borrow to buy new vehicles look to make payments every two weeks, with the arrival of their paychecks, said Robert Karwel, a senior manager for J.D. Power in Canada.

[Keyur Shah]

There's nothing illegal or even deceptive about dealers offering loan periods extending out 6 or 7 years. A long tenure will make you owe on your car than it's worth it because your car is depreciating faster than you're paying it off. If you're considering a long loan period, you probably should scale back to a less expensive car better suited to your budget Using a car loan as an option to purchase a car that you cannot afford does not usually end well.

It's better to go for a single downpayment way. Put less of your money in a depreciating asset as a car is a depreciating asset as it's value is constantly dropping. These are just my view: Opt for a shorter tenure and reducing balance method while applying for a car loan since every EMI consists of a component of principal and interest paid, and the interest is calculated on the remaining principal amount at the end of each month. Negotiate for better rates and waiver of charges which will reduce the effective cost of owning a car.

[hemj]

I know that it has been a long time since anyone posted here, but I'm left wondering why nobody had considered inflation as a factor.

Inflation alone makes paying outright for a car, the most insane decision.

My sister's husband is one of those people that hates loans like many seem to here. They were planning to buy a car outright for 20L. At the end of 7 yrs, they would have only a fully depreciated car probably valued at 6-7 lakh if I'm being generous and adjusting for inflation.

Advised them to invest the money smartly in a small business with a cash flow of approximately an amount equal to the emi. Now at the end of 7 years, they have a fully depreciated car valued at 6-7 lakh adjusted for inflation and 20 lakh corpus and inflation adjusted is worth 13lakh of today's money. So in toto near complete preservation of capital, 20lakh cash in Hand plus 6 lakh car, totalling 26 lakh worth about 17lakh in today's money.

Why is this not a good deal? Or am i really stupid and not seeing the real picture? I understand earning that kind of return is not possible for everyone, but it's possible for us and hence advised them the same.

Even if I was a salary earning person, I would advise to still go for the same. If I'm paying 20k today and the same 20k 7 yrs from now, the future 20k is worth only 13k in today's money and my salary would obviously have increased and the percentage of my salary towards emi would have been almost cut in half or atleast by a third.

Outright purchase only makes sense in a developed country with very low inflation, where you would still lose the opportunity cost of investing a bulk amount into a business.

Am I horribly wrong and have given my own sister really poor advise? I can't see it with my brain.