[mayank0782]

Only considering how much money I will be left with after a certain period if I take a loan or do a lump sum payment, it seems to me that making a lump sump payment (if I can) will always be a better proposition. Higher loan duration would increase this difference even more.

A simple calculation not considering any down payment and using available online calculators to arrive at the final numbers -



Cash in hand after 5 years in case of loan is the amount you will have if you invest in RD (bare minimum returns). Investing elsewhere with higher returns would turn this situation upside down.

Cash in hand after 5 years in case of loan is the amount you will have if you put your money in FD.

[aviraj]

Originally Posted by 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.

That may be incorrect. In case of an adverse situation if you have to payback your loan entirely (from your reserve fund), it may so happen that the balance loan amount may be more than the cost of the car at that point due to depreciation. The car depreciates faster than the reduction of loan principal. So you wont have the car and a part of the reserve fund as well. Loan amount must therefore be kept to a minimum possible and not 70-80% of the cost of the vehicle.

[The Observer]

Originally Posted by 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.

Very smart move. I too am contemplating the same. Folks out here especially if you are salaried, have a H/L - you should look at this product from SBI ( m sure other banks too might have variants of this product)

Voted for 4 years, but mine is a 4 year interest free company loan that also gives a tax benefit ( i.e. my company car policy was structured that way). My firm belief is to plan your financial goals and then start building corpus ( equity MF, stocks, Debt funds, RD etc) rather than taking loans unless of course its really necessary. Its a no brainer for salaried folks that loans on depreciating assets don't make financial sense but i fully understand the "urges" as i am in my early thirties too. When i got married around 6 yrs ago i had 2.5L in savings and wanted to immediately get a new car ( had a 3 yr old Wagon R at that time) - but both set of parents made me buy a house instead and continue with the old car i had. Now, in retrospect this makes perfect sense though the initial pinch of a H/L EMI was well "frustrating" for at least a year. For my next car - i have already started investing so i can keep my loan component ( if i have to) as less as possible.

Slightly OT : Going back further, if in 2008 instead of buying my wagon R had i bought Maruti shares for the same amount - i would be sitting on around 28L cash by now, but like in GTO's line - Its foresight that counts !

P.S : Not advocating investing in Real estate or say even in equity markets blindly - please do adequate due diligence, for the patient, steadfast and trained eye - opportunities to build wealth still exist !

[OrangeCar]

I believe, there cannot be a single answer to this question. To each, his own.

People take time to save money. And some common instruments used to saving is through bonds or equity.

Unlikely that a person would use equity to save for a car, due to the inherent risk factor. You might lose money, right about the time you want to buy a car.

Bonds, I refer to FDs and RDs as bonds.

The problem with FDs and RDs is that it takes time to grow money. Additionally, there is big brother waiting for your 'savings' to mature to take a bite out of it, i.e., taxes!

Why save money to buy (not 'invest') a dramatically depreciating asset!

Instead, take a loan.

Advantages of taking a loan -
1. You get to buy a car - today! All of us are getting old. What's the point of owning a good car (let alone your dream car) when you are older. A younger you, will enjoy any car than an older you, always!

2. Value of money decreases over time. In a country like ours, with relatively high inflation, value of money reduces over a period of time. 25K today will not be the same worth in 3 years. Think of all the things you could buy for 25K 10 years ago and what you could buy today. Therefore, EMIs will pinch lesser than what they do today.

3. The ratio of EMI/income will reduce over the loan tenure. Ideally, or mostly, your income is likely to increase (from 4% to 15% per annually, on an average). By the third year, EMIs wont be a huge burden on you.

4. You put in all the efforts, and save. You go buy a 10L car. You take it out of the showroom, the car has already depreciated, say 10% conservatively. You just lost 1L of your hard investment on day 1. Doesn't look pretty, does it?

Given all these, a loan would probably be better way of car ownership. But, one must be mindful of EMIs one can afford, what is the number of years one can pay EMIs.

Loan duration will also depend on the car you are buying. Some cars become duds when they are 5 or 7 year old. So you keep paying EMIs till the end of the life of the product. Again, not a desirable picture. Ideally, EMIs ending by half the duration of desired car ownership would be comfortable.

Additionally, below graphs give the approximate EMIs one as the pay for a 10L loan, and 10% rate of interest for different tenures. You can see with a 3 year loan, around 13% of your outflow is the cost of servicing the loan, i.e., interest component. If 32K is too high for you, 21K for a 5 year loan means 21% of your outflow is towards interest.

[kmsithan]

I voted for 3 years. Below are the reasons:

(1) I would limit my budget for the car by considering the EMI outflow from my salary without considering the hikes/bonus. Obviously I will have some savings + resale value of current car

(2) Even with Three years tenure, I target to close the loan using the bonus and other corpus like RD, MF or Equity

This method is bit difficult as it restricts the budget for the new car and heavy EMI outflow for couple of years. But achievable if one can keep the current car for at least 7 years and generate enough savings for the next car.

I would love to buy my next car without any loan like what was described in the guide written by our TBHP expert smartcat. Here is the link:

http://www.team-bhp.com/forum/indian...ve-sector.html

[aabhimanyu04]

Originally Posted by aaggoswami

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.

I voted for 7years,

This is a very interesting discussion that will require a cuppa and two chairs on a beach side. For some, investing in happiness is investment, for some investing in 'assets' is. It is important to know how to define assets? What is an asset for you? Memories or things? or a blend of both?

To each his own.

[gksunil]

Originally Posted by aabhimanyu04

I voted for 7years,

Wow! GTO would never have thought of this angle! Really true and I believe that depreciating asset is a word which the younger generation fail to understand. That being said, the ancient gurus and the contemporary ones give the same advice; live in the present! If you can enjoy your car now, even you can;t really afford it, then ?

[highway_star]

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.

Originally Posted by Altocumulus

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.

Sawyer has already explained this - you need to calculate Net Present Value (NPV) for cash flows at different time periods and compare them. It appears that you are not familiar with the concept of NPV and I believe there will be many readers unfamiliar with financial concepts who will be getting confused by your arguments. So let me try to explain things in a different way.

The key point of your argument is that is that you are paying less money in EMI compared with what you get from the FD when it matures (13,56,516 in EMI vs 17,13,824 from FD at maturity). However what you are overlooking is that to if you took 10 lakh on loan and put it into an FD then the EMI will have to be paid from your own funds. Now if you are deploying your own funds it is not at all surprising that you will end up with some profit after assuming a certain rate of return on your investment.

The correct question to ask here is whether you could have ended up with a positive amount of money without deploying your own funds. If you can do that, then you have found a way of gaming the system and making money out of it (beyond what any normal investor could make).

So the situation to consider would be as follows. Take a loan of 10 lakh. Invest it into a fund which allows frequent withdrawals (for example a liquid fund) and provides a return of 8% on the invested amount. Withdraw INR 16,149 from it every month and use it to pay the EMI. Now you have not used any of your own funds so if you can end up with a positive amount left in your fund at the end you have found a way of making extra money.

So if you follow the above plan what will happen? You will find that the amount in your fund keeps going down every month as you keep doing withdrawals to pay the EMI. Before 84 months are over the value of your fund would have become zero. You would have to actually get additional money from somewhere else to pay of the EMI. So there is no extra profit to be made here.

[Sawyer]

Originally Posted by gksunil

the ancient gurus and the contemporary ones give the same advice; live in the present! If you can enjoy your car now, even you can;t really afford it, then ?

Cherry picking is dangerous; the same sources also say: Live within your means.

The only way to gain by taking loans and having a personal balance sheet that is in the red is to die early so there is no need for a retirement corpus. And there is no dependent family.

The ant and the grasshopper story has just this one flaw in it - neither will live long enough for it to fully play out to its logical conclusion.

On the NPV subject: there is a simple way to understand the concept of time value of money.

Assuming interest rates and inflation totalling to 10%, if someone offers you Rs 15 lakhs today or Rs 16 lakhs after one year, what would you pick? The "profit" of Rs 1 lakh? Or the "loss" of Rs 1 lakh? I pick the loss. Because the 16 lakhs a year from now, is worth only Rs 14.54 lakhs today and less than Rs 15 lakhs.

Once that decision is correctly made, the next step is to figure out that in a case where different amounts of money are being paid/received at different points in time in future, it is necessary to restate all of them to their value today, for a valid calculation of profit/loss to allow for rational decision making. It is just a matter of having all comparisons to be on an apples to apples basis. A rupee in hand today and a rupee received a year for now is apples versus oranges.

Once this is understood, the rest is just arithmetic. NPV just sounds like a complex MBA term, it isn't. Every businessman that pays interest understand this intuitively or goes bankrupt.

[Altocumulus]

Originally Posted by highway_star

Sawyer has already explained this - you need to calculate Net Present Value (NPV) for cash flows at different time periods and compare them. It appears that you are not familiar with the concept of NPV and I believe there will be many readers unfamiliar with financial concepts who will be getting confused by your arguments. So let me try to explain things in a different way.

The key point of your argument is that is that you are paying less money in EMI compared with what you get from the FD when it matures (13,56,516 in EMI vs 17,13,824 from FD at maturity). However what you are overlooking is that to if you took 10 lakh on loan and put it into an FD then the EMI will have to be paid from your own funds. Now if you are deploying your own funds it is not at all surprising that you will end up with some profit after assuming a certain rate of return on your investment.

The correct question to ask here is whether you could have ended up with a positive amount of money without deploying your own funds. If you can do that, then you have found a way of gaming the system and making money out of it (beyond what any normal investor could make).

So the situation to consider would be as follows. Take a loan of 10 lakh. Invest it into a fund which allows frequent withdrawals (for example a liquid fund) and provides a return of 8% on the invested amount. Withdraw INR 16,149 from it every month and use it to pay the EMI. Now you have not used any of your own funds so if you can end up with a positive amount left in your fund at the end you have found a way of making extra money.

So if you follow the above plan what will happen? You will find that the amount in your fund keeps going down every month as you keep doing withdrawals to pay the EMI. Before 84 months are over the value of your fund would have become zero. You would have to actually get additional money from somewhere else to pay of the EMI. So there is no extra profit to be made here.

You are again following the same path as Sawyer and the others did. If I pay upfront the 10L, I will need to build it again because it is from my savings. Please understand, very few people have crores in their account for whom a 10L or even a 30L spend doesn't matter or a profit of 3L in 7 years is minuscule. I am not one of those guys and am sure there are quite a few along with me. Why will I withdraw from the FD or whatever investment to pay the EMI. I will keep it invested because I can afford that EMI easily. If I pay upfront, for me to build that again, I will have to put money aside for it in place of the EMI . So effectively I will pay the 10L and then additionally I have to keep money aside every month to build that 10L again.

A positive NPV by definition says that the projected earnings generated by an investment is more than the associated costs.
If put the money in an FD the NPV is positive (because it will earn interest for me). If I pay upfront it will become zero (no earnings from it). If a loan is taken the interest (cost) will be 3.56L and earned from the investment (around 6L+) is much more. Please look at both of these together, take a loan and invest the same amount.

Yes the value of money reduces over time, however if I pay upfront where will I have the money to determine its value in future. If I invest I have positive value to project.

Originally Posted by Sawyer

A rupee in hand today and a rupee received a year for now is apples versus oranges.

If you pay upfront you wont have anything in hand for you to receive anything later. It's like you are giving away that 15L as well as the 16L. So now you have to build even that 15L by yourself from scratch.
Coming back to our calculations, the extra 2-3L I will get in 7 years is always better than 0L. That 2-3L will always have some value be it today, 7 years or 15 years from now. Maybe it's value will decrease but some value will always be there, at least to people like me. If not anything, I can balance out a major chunk of the depreciation of the car. Even if I sell the car for 5L after 7 years, I will think I got the car for 9L and sold it for 5 rather than buy it for 12L and sell for 5L.

[imp!]

On pre-owned cars we prefer not to take a loan. This may change if we ever buy luxury pre-owned cars.

On 90% of our new car purchases we finance for 3 years and usually keep the car 7-10 years. The balance 10% we just pay the car off.

As a businessman, I share GTOs sentiments. I'd rather invest our money on cap goods than spend it on a car and I hate personal loans with a passion. Just don't have the mentality to be comfortable with them.

[shekatkar31]

For me the math depends on the cost of the car, the initial down-payment and the EMI amount. When I bought the i-10 in 2007, I took a 3 year loan as the initial payment was substantial.

However, when I went for the XUV in 2014, I decided for the 7 year tenure to balance the initial payment and the EMI amount. I feel it all depends on the cash availability and the monthly spend preference of the buyer.

[highway_star]

Altocumulus, there are so many flaws in your reasoning that it is difficult to address each of them, but I will make one more attempt.

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 or a profit of 3L in 7 years is minuscule. I am not one of those guys and am sure there are quite a few along with me.

For those who do not have money to pay upfront and still want a car this question is redundant. The question arises only when you have the option to pay upfront. No one has said that a profit of 3L is minuscule so you are arguing against a point which no one has made. All that matters is which option will give you a higher profit.

Originally Posted by Altocumulus

Why will I withdraw from the FD or whatever investment to pay the EMI. I will keep it invested because I can afford that EMI easily.

You should withdraw from the FD if the interest rate on EMI is higher than the interest rate on FD. Whether you can afford to pay the EMI is not relevant at all.

Originally Posted by Altocumulus

If I pay upfront, for me to build that again, I will have to put money aside for it in place of the EMI . So effectively I will pay the 10L and then additionally I have to keep money aside every month to build that 10L again.

You are double counting. A spend of 10 lakh is a spend of 10 lakh. Building the 10 lakh again is a different activity.

Originally Posted by Altocumulus

If put the money in an FD the NPV is positive (because it will earn interest for me).

No, the NPV from the FD will be positive only if the discounting rate which you use is lower than the interest rate on the FD. If you are funding the FD from a loan then the cost of funds is higher than returns so NPV is negative.

Originally Posted by Altocumulus

If I pay upfront it will become zero (no earnings from it).

The Present Value of a payment of 10 lakh made today is just 10 lakh. Both earnings and expenditures have a Present Value which is calculated in the same way.

Originally Posted by Altocumulus

If a loan is taken the interest (cost) will be 3.56L and earned from the investment (around 6L+) is much more. Please look at both of these together, take a loan and invest the same amount.

As I have explained in my earlier post you will not get the higher earning by investing the same amount. You are getting it by bringing in additional funds to pay the EMI so it is natural that you will get more returns.

Originally Posted by Altocumulus

Yes the value of money reduces over time, however if I pay upfront where will I have the money to determine its value in future. If I invest I have positive value to project.

You do not need to actually have the money in hand to determine its value in the future. A simple calculation of what it could have earned if you invested is enough.

[Altocumulus]

Originally Posted by highway_star

You are double counting. A spend of 10 lakh is a spend of 10 lakh. Building the 10 lakh again is a different activity.

And that is where my issue is, I just cannot discount that activity because it would be a huge chunk from my savings.

Anyways now we are stretching this topic. . If anyone finds my points are something which make sense, they can follow them, else spend their savings for buying their car. Either ways the excitement and emotions of finally buying that car is what matters.

[nd4$pd]

Originally Posted by highway_star

You should withdraw from the FD if the interest rate on EMI is higher than the interest rate on FD. Whether you can afford to pay the EMI is not relevant at all.

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.