[Sawyer]

Originally Posted by Altocumulus

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.

I am giving an answer. I still think there is more to it that will demonstrate even better why you are wrong, but even this one will show you this, even in an incomplete and therefore smaller way.

First, the FD rates these days are in the 6.5% region. And you will have to pay income tax on this interest income. Assuming this will be 15%, the total amount you will get in hand when the FD matures is Rs 14.50 lakhs. As a salaried individual, there is no corresponding tax relief that reduces the Rs 13.56 lakhs in any way. You will say, ok, but I am still making a profit to which I will say, no, and here is why:

You will get this 14.50 lakhs in hand only after 7 years, while you are paying Rs 13.56 lakhs starting from month 1 of year 1, for 84 months. The correct way to compare the value of both amounts is to find the net present value of both; what both amounts are worth today, if you either received or paid them in full today, taking into account interest and inflation. Once you did that you would find that both numbers reduce in value, but 14.50 lakhs will end up lower than 13.56 lakhs. Because it is received at the end of 84 months.

Are any processing charges or any expenses of any kind payable on taking the loan? If any, these will have to be factored in as well, and these will not reduce in the present value calculations since they are to be paid today and will be added as such to the present value of the 13.56 lakhs and will increase the difference between that and the present value of Rs 14.50 lakhs.

Bottom line is that essentially the same people are lending to you and borrowing from you by accepting your money in FD; there is no way they could be doing this at the loss needed for you to make what seems to you to be a profit, without getting bankrupt themselves. Yes, there may be some benefits to doing this, but there is a cost to these. You don't get these AND make a profit.

PS: If I discount both sides to present value, based on a 10% discount rate that accounts for interest and inflation, the 14.50 lakhs received after 84 months is worth 7.44 lakhs today. And the cost today of Rs 16,149 paid every month for 84 months out from today, is Rs 9.88 lakhs. So in terms of present value today that allows the apples to apples comparison that is necessary, you are losing Rs 2.44 lakhs by taking the loan. Which is the cost of the intangible benefits you are getting, so you have to decide if they are worth that cost. And any upfront amounts paid in the taking the loan route are to be added to the Rs 2.44 lakhs without any discounting, because they are paid on day 1.

Originally Posted by lazy

Certainly believe that if one cannot buy a car outright, then its beyond ones means (aukaad).

I could not have said it better; because living beyond one's means is a double whammy.

First, it comes in the way of building a corpus for a rainy day, emergencies and ultimately, retirement for a generation that will need this more than those in the past because it is far less likely that its children will look after it the way it looks after - hopefully! - its parents. In a country where life expectancy post retirement is rising and where the country is too poor to have social security schemes that will do this. How much corpus will be needed for retirement in comfort can be calculated quite easily with help from Google search and the answer will frighten those doing it for the first time.

Second, it creates a standard of living that is difficult to sustain after retirement.

Far more useful therefore to my mind are the threads here that advocate using a car much longer that the usual 4-5 years and that talk about why buying used cars is a good idea.

And to resist the aggressive marketing of loans that is widely practiced now. We are going down the same road as in the US where much of the GDP growth is build on very fragile foundations of consumer debt. Such practices will only end in tears. What is also ironic is that a lot of conspicuous consumption that will create envy in the less fortunate millions and millions in India, is also injurious to the financial health of the consumers that are being envied. And where cars are concerned, what is the point in taking loans to buy bigger and bigger cars when family sizes are reducing and where these big cars will consume road and parking places that are scarce in cities, while being used to transport just one or two people most of the times?

[aadya]

I voted for 3 years. I am not for losing liquidity if we are paying upfront for the car. At the same time I am also not for stepping too wide into a financial quagmire. Car loans are preferred only for 3 reasons 1.Liquidity 2.Liquidity 3.Liquidity. Housing loans followed Car loans are the cheapest loans to avail, with some minimal tax benefits.

There are simple thumb(or index whatever) rules to follow. These rules are for average middle class bread winner's (not for ultra rich/well off, who need not work for another day in their life to make a earning).

1.There is nothing wrong in buying a used car, as long it is well maintained. Please do not attach pride value to your first automobile. It gives you time to improve your finances and experience automobile ownership without loosing too much.

2.Do not use your entire savings on car purchase. Easy rule is try paying 50% OTR with 50% savings. In other words buy a car within the level of your entire savings with 50% down payment.

3.Make sure the the OTR price of car is 3-6 times of your monthly income. Beyond that is high risk expense in a depreciating asset. Stretch the budget only for safety features.

4.Let the EMI be less than 20% of your monthly income.

5.Too long loan tenure is not good as you incur loss in interest and also as foreclosure charges, in case you want to change the car.

6.Remaining 50% of savings invest in index fund or equity fund(preferably large cap). Though capital loss is a possiblity, this is the only class of investment which can fetch you inflation beating, tax free returns, higher than the interest on the loan. Use SIP route for spreading the risk. If you are a businessman then investing it in your business is the way to go.

7.Never rush through the purchase of a car just because your collegaue, neighbour or a relative has bought one. Postpone the purchase for few months and relook at your finances.

8.FD is not a good option to park the money meant for Car loan repayment.If you have too much surplus pay back the loan.

[Altocumulus]

Originally Posted by Sawyer

I am giving an answer. I still think there is more to it that will demonstrate even better why you are wrong, but even this one will show you this, even in an incomplete and therefore smaller way.

I understand where you are coming from. However below is my view for your answer in 2 parts.

Let's see the value part first. A normal salaried person would take about 5-7 years to save 10L. Would'nt the value go down from the time he started saving? What is 10L today for him was valued much more when he started saving. Also when he started saving a Honda City was 8-9L but today it will be 12L. I am not talking about people who have inherited 'aukaad' but who builds his from scratch. Also he will only give away 10L when he has saved atleast 20-25L since he won't give away everything in one go. So to build his so called aukaad it will take him even more time thereby losing value even more. So the losing value scenario is relevant in both cases. Also now he needs to build that 10L back again from scratch. So while doing that he will lose value there as well.

Now coming to the other part. When I take a car loan I am paying a flat interest rate of 5% and during that exactly same time I will be earning a flat interest rate of 8.2% by investing the 10L in hand (going by your proposed 6.5% when compounded quarterly comes to overall flat 8.2%). Even if I pay tax it will still be more than the total interest I pay for my loan.

What you are forgetting that by paying in cash you would need to build that back to your portfolio again unless you dont need that money anymore. So if the definition of aukaad is buying a car with money you dont need anymore then that is a scenario and I hope you are not hinting towards that.

What I will see is what I am left with in my account after 7 years and and what I have spent in those years.
If I take a loan, I will spend 13.56L however will have 15.7L in my account.
By paying outright, I will be spending 10L but I also have to build back that 10L in the future. If I do that by putting the same amount as the EMI in an RD, I would be spending 10L+13.56L and then have around 16L in my account. Value loss or not, my account has more in it after 7 years with me taking a loan and investing an equivalent amount.

[Sawyer]

Originally Posted by Altocumulus

Value loss or not, my account has more in it after 7 years with me taking a loan and investing an equivalent amount.

This is just not possible if by account you mean a personal balance sheet; you would put the lender out of business because for you to be ahead, the lender has to be behind. You can only come out ahead if your investment delivers returns that are far more than those the same lender - a bank - will offer. And that will come with risk commensurate with the returns.

Just like there are no perpetual motion machines, there are no free lunches in the world.

It would be a good idea for you to build a financial plan that achieves the corpus in hand you would need on the day you retire; preferably consulting a financial advisor. If your borrowing and EMIs fit into that plan, by all means take loans.

[dark.knight]

I'm not a numbers guy, rather I'm too lazy to do numbers though I'm well aware of the advantages when one delves deep into them factoring in tax breaks, alternative use of capital etc. I'm not an investor, just a staunch believer in the ultimate bottomline per month and that's all that I need to look at.

With that being said, I believe one never 'owns' a car until they 'own' it. It has to be full cash down as far as I see it. I hate banks like the plague, they're just a necessary evil to generate interest from my funds and that's it.

[Sawyer]

Originally Posted by dark.knight

I hate banks like the plague, they're just a necessary evil to generate interest from my funds and that's it.

Lol. That is extreme, while I see your point and agree fully with rest of your post.

Banks provide a very wide range of useful services just like credit cards do. But they are a tool and like any, can be misused. Unfortunately, because your misusing the tool can mean more business for the banks, they advertise how you can misuse it quite aggressively.

As an example: I always pay my entire credit card amount due in full, at the end of the month. Some years ago I had paid a large amount in this way and a couple of days later I got a call from the bank asking me why I had done this; they offered to pay back 90% of this amount to me, and collect the rest in "easy" instalments. I refused the offer, which by the way, also irritated me. But that isn't to say that credit cards are useless and to be avoided; I do almost all my expenses, including online shopping now, using one. And thankfully, the practice of making calls offering to return the money received in full settlement of the monthly use has stopped.

On the other hand, I know people that pay the bills using another card and dancing the tightrope of what happens when amounts paid are restricted to the various minimum amounts due.

[dheepak10]

For a personal vehicle, ideally one shouldn't be taking a loan on a depreciating asset. Buying the car outright is the best way.

But it doesn't work that way always. The second best way is to limit the tenure to 2 years maximum. This will limit the losses of the individual.

An INR 5 lakh loan @ 10% ROI with 5 year tenure will result in a total interest of INR 1,37,500/- while the same loan for a 2 year tenure will result in an interest amount of INR 53,700/-.

The only reason not to buy the car outright when you have the money is that the ROI is low (less than 10%) and you have avenues for getting a better return on your investments. Even in that case, I would suggest limiting the tenure to 2 years as we generally deal with floating rates in loan.

For businesses, loan is a better option as you can always offset it against expenses and avoid a larger tax amount.

[Altocumulus]

Originally Posted by Sawyer

This is just not possible if by account you mean a personal balance sheet; you would put the lender out of business because for you to be ahead, the lender has to be behind. You can only come out ahead if your investment delivers returns that are far more than those the same lender - a bank - will offer. And that will come with risk commensurate with the returns.

Just like there are no perpetual motion machines, there are no free lunches in the world.

It would be a good idea for you to build a financial plan that achieves the corpus in hand you would need on the day you retire; preferably consulting a financial advisor. If your borrowing and EMIs fit into that plan, by all means take loans.

You are harping on the statement it is not possible and bank will go bankrupt. However I have used your numbers to do the calculation. I used your number of 6.5% when I know my bank is still giving 7-7.5%. This interest rate will be fixed for my tenure and not float. Similarly for the car loan. If I fix it with my mom's name who does not have any income I won't even have to pay tax and also get more because she is a senior citizen. Or I can fix for 5 yr tenure and not pay tax. Simple mathematics shows I will lose money if I pay upfront and no one has yet come back mathematically or logically showing that is wrong.

The interest I pay for a car loan of 10L in 7 yrs is 3.56L and the interest I get from investing 10L for exactly the same amount of time if required in minutes is more than 5L and the money stays with me all through. If I pay up front I lose that 10L and have to build it from scratch again. Even if I don't have to build I don't gain anything but in the other case I do atleast 1.5 L depending on the interest rate I out it in.

Now for banks going bankrupt. What you are doing with your credit card shouldn't that bank go bankrupt with it. You are using their money for about 50 days every single month and then paying back without paying interest. But you are taking their reward points and service. Are they going bankrupt. Do car insurance companies go bankrupt when you pay them 30k and claim 5L incase of an accident. I am IRDA certified so I am aware of how the insurance companies pump out the money. Banks invest your FD money in the market where they earn manifold and give us a small part as interest. Also the money they give as loan is shown as a liability as they get tax benefits.

Hope this clarifies.

[PearlJam]

Excellent number crunching by many members

The biggest problem with loans from banks or other institutions is the headache involved in processing. Irrespective of tenure, we need:

* Constant follow up with banks, inspite of the logical thought that competition should have solved that. Once you pay the fee, or give proofs, you're at their mercy on the time lines
* Countless signatures and ID proofs, inspite of Aadhar linkage
* The pain of actually talking to somebody, inspite of online forms
* Cancelling of hypothecation once the loan tenure is over. I'm not sure how easy it is today. But a couple of years ago, I had to really run around for this. Finally had to go to an 'agent' to get this done.

According to me, the win-win situation is to borrow from a trusted (more of him/her trusting you ) friend/relative, who any way invests in FDs. You can split the interest rate difference, have your own tenure and payment terms, and avoid the above hassles!

[Sawyer]

Originally Posted by Altocumulus

Hope this clarifies.

It doesn't, but that's ok.

[V.Narayan]

Originally Posted by smartcat

No car loans for me. Somehow I do not like the idea of loans and interest. But that's just my weird thing. For others, this is the right thing to do

Yup. None for me either.

Originally Posted by Sawyer

To my mind, one should not take loans to buy assets that lose value; it only makes sense to buy real estate on borrowed money, if that is appreciating in value at rates higher than the interest rate.

Originally Posted by Sawyer

The one big problem I see with the current folk in their thirties is that few are building a retirement corpus in a country where there is zero social security. Instead most are in the red with loans of various kinds of which only those taken against real estate make some economic sense.

Well said @Sawyer. From the wisdom in your posts I bet you are over 55 years of age! - like me!!

Originally Posted by aargee

Attachment 1652629

In Thamizh there's a saying "Kadan pattar nenjampol kalanginan Elangai vendan" referencing a quote in Ramayana, "Ravana's heart was filled with as much sorrow as one has been in debt". To make things clear, debt is something that was totally to be avoided & stay off said right from few 1000 centuries ago in our culture.

But in today's world, there are people without aids, but not without debt. It's like a cancer spreading through out. But the thumb rule always is that, never bite more than you can chew

Agree 100%.

Being in late middle age I am at a stage in life where I assume I know everything and as I have never taken a consumer loan I consider my self eminently qualified to comment. So forgive me.

For the young I guess the desire to build a standard of living is high and loans are easy to get. Car loans have helped the auto industry to grow. And they have enabled many to acquire 4 wheels by dipping into their assumed future income. I suppose car loans also form one of the pillars of the retail banking industry and have created jobs for lakhs.

Folks, I can understand taking a loan to buy an income generating asset (production machines or a house)where the cash flow from the asset pays off the loan. Loans in moderation especially to buy a house can be justified by the rent you save and the future appreciating asset you get to own. But to take on debt for a consumption item is like borrowing from your future. Our habits get set early in life.

Our economy has seen good days for about 15 to 18 years so there is a vast pool of citizens who have only seen relative job security & rising incomes. If our finances have to be planned for a life of 80 years then constantly rising income can be a tricky assumption to make. In 2006 I once had an employee who went for his first foreign holiday on credit through multiple credit cards. This surfaced when he lost his job a few months later and his wife came to our HR with this tale of woe!

To all the younger folks on T-BHP. Take loans for cars if you need to but do so in moderation. The power of "cash in hand now" that loans give us can make us think we are more powerful and invincible than we really are.

[Altocumulus]

What I am failing to understand is all those who are contradicting themselves. At one point you are saying build a corpus for your future and then you are saying if you need a car break that corpus and then build it again from scratch.

What I was saying helps me retain that corpus with me and also save 15% more. If any bad times come I can sell the car and pay off the loan with it. I don't even need to touch the money I saved all these years.

And if just by buying a car or anything on loan it is concluded that the person doesn't deserve it or doesn't have the aukaad then ninety percent of the people in this forum and country and the world doesn't have the aukaad to buy a car other than it being offending. If everyone thought that what would have to the world economy.

[chncar]

I think the lender is an important factor as well. SBI for example, allows full or part prepayment without any penalty. So basically you can take a 5 year loan and pay it off earlier and still retain the flexibility. I still wouldn't recommend going beyond a 5 year tenure though.

With most private lenders they only allow full pre-payment and also apply penalties for doing so, hence for all practical purposes unless one comes upon enough liquid funds to buy the car outright (which begs the question, why a loan in the first place) you are locked into the tenure of the loan.

[arjithin]

I have a SBI maxgain housing loan, and i use this account to withdraw money instead of taking any other loans..so thats a car loan at the rate of a housing loan without any additional documentation and hypothecation.

[aaggoswami]

Key here is profession. Government employees usually can take higher risk of having debt for a car. But for individuals who are not so sure about future security or having any doubt about future security, a long term debt does not make sense. Max. should be 5 years in my view and that is what I prefer if I have to zero in for a loan. But loan for a car is something I wont be able to digest. For an asset that is likely to appreciate, debt is still understandable.

Next up is investments. If done smartly, one can have a lower loan amount and some amount could be had from the investments. Though am not an investor into equity, it looks reasonably lucrative for very long term investment (20+ years).

To sum up, I did rather have a car which is one notch (segment) down without loan rather than what I can afford with loan. There is an old Gujarati phrase stating that debt should be taken care off as soon as it raises its ugly head. However, today's era is too much focused on credit I believe.