[JJ1991]

Being a bank employee loans are the way to go. Vehicles loans are calculated on simple interest for us and there is an additional concession of 0.1 percent in case of EVs. But now a days interest rate for the public has also came down for the public, if you have a good cibil score you can get a vehicle loan for about 6.8 percent . If there is a shortage of funds taking a small vehicle loan can be also a viable option, but make sure to close it before the tenure.

[deathwalkr]

Originally Posted by prajwalmr62

Without knowing your current financial status, it is hard to suggest anything. I would say talk to some finance planner for the same, suggestions from online can be dangerous.

Saying this, I would suggest you not to pour all your savings to buy a car. My personal rule is, if you can buy 2 cars of same price, buy 1 car. loan or otherwise.

From my salary what i can afford is around 20k as EMI maybe stretch it to 25k.

Not taking anything away from my stocks/mutual funds, those will continue. Have a couple of FDs maturing later this month so thought i'd use that for down payment and the rest as loan.

[SR-71]

Voted for 'Loan for other reasons' as there is no option for a company leased car.

I hate EMIs, the only time I am OK with an EMI is when I know I have the entire principal to be paid off if push comes to shove and that I get some tax benefit by choosing the EMI route. However, for the next purchase I am thinking of using my company's car lease scheme. Despite the high interest rate and the minimum 36 months EMI window, the tax benefits ensures, I end up paying only 90% of the cars (ones I have shortlisted) OTR.

[thedatta]

This is ironically my first post on Team BHP after having avidly followed it for information and learning for going through 3 cars now over my last 13 years of car ownership. But this was an interesting post to kick off my participation:

The vast majority of the comments are divided into the following categories:

1. No loan: Will never take loan. It is overreaching as you don’t have the upfront cash for it. You are paying money to the banks as interest. Indian middle class sensibility, delayed gratification is better etc. etc.

2. Yes Loan: Its fine as long as you ensure the EMIs dont stretch your financial stability, Opportunity cost is higher in paying by cash as you can earn higher returns vis-a-vis the car loan interest. It is a consumption purchase which is a combination of need and want and we should not delay gratification. Early years of earning this is the only way someone can buy a car. There is a cushion of keeping savings for a rainy day instead of liquidating the savings.

My two cents are as follows: I am in the camp of the second bucket. Undoubtedly if one has enough cash lying around wherein you need not blink too much in purchasing in cash that is undoubtedly the only choice. However, for a salaried professional a loan is the safest way to buy a car as you can see your EMI in your budget is not stretching you after accounting for other expenses. For a car the interest cost is not as high as the tenor of the loan is usually lesser (even in a high interest rate scenario). Look at financing as a tool of allowing you to make the consumption purchase earlier for which you are paying a slightly higher cost. Instead if you waited till you saved for the full price that time is lost forever. Time is the most valuable quantity that we have and in my humble opinion delayed gratification is not worth it. I think tax benefits are secondary and not really that important to the analysis. Needless to say balance is essential so that you dont overreach and fall into a debt trap. Even India’s richest men have taken thousands of crores of loan to leverage and aim for growth of their business (agree the difference is that is for a business which has growth potential and not a depreciating asset like a car).Some have overreached and they have been propelled into bankruptcy. Others have leveraged and increased their net worth exponentially. Taking a reasonably sized debt and servicing it over time also increases the credit score and helps in case of a home loan.

I bought my first car in my second year of working and I did not have enough savings to cover the cost as the first year is not enough to save up and most of us have high lifestyle expenses at that stage in life. Within a few years my second car was also bought on loan at that time as I was saving up for the down buy a house, which I used for 8+ years. My most recent car purchase was paid in cash due to a very different financial condition after having worked for a decade and more.

The answer may vary depending on the stage of ones life and also whether one is salaried or business. I don’t think its a plain black and white answer to the question. I dont agree with many of the moral and value judgments on taking debt being given by many. I am not saying everyone should overreach for status in excess of your current status, but as long as loans are used judiciously it helps us experience a car in our earlier years, which time will not come back.

[PaceTraveller]

Purchased my first car in 2014 at the age of 24, back then I had no option but to take a car loan. I took loan from Reliance Commercial Finance (Since my salary was paltry as compared to the car price - I was buying Nissan Micra CVT - no bank was willing to give me a loan, had to go the NBFC route through car dealer).

Now I am in the market for a new car. This time things have changed on multiple fronts.
One - I became a disciple of Value Investing by studying Warren Buffett, Charlie Munger, Mohnish Pabrai, Benjamin Graham, Joel Greenblatt, Howard Marks and so on…
Two - Based on the recently acquired investing skills (about 2.5 years ago), I made sizeable gains through my equity portfolio.
Three - As a result of one and two, the car I have decided to buy is less than 25% of my liquid networth (invested money).

Now Mohnish Pabrai says (I am paraphrasing) - if you have confidence on your investing skills, i.e. you think there’s a fairly high probability that you’ll earn better returns than the interest rate charged by bank, you should always go for car loan and use the investible surplus for gains.
On the contrary, Charlie Munger says (paraphrasing again), don’t spend sizable amount of your net worth on depreciating assets - and hence, since something is not worth your sizeable investible net worth, its not worth the hassle to go for a loan.

I was and I continue to be in the Charlie Munger way of thinking. I have been investing/saving diligently to bring my investible net worth to a level that the car cost is not too large in comparison to my liquid net worth.

However, due to some recent developments, the plans are out of the window. I am now in market for a car asap.

At first I thought of compromising on the car and choosing something that is <8-9% of liquid net worth, that way, I do not have to bother about loan. But after a lot of research, test drives, user reviews, etc., we (I and family) decided its not worth it to compromise on car. Let’s just go with what gives peace of mind as I usually use my cars for as long as they remain usable.

Hence, I took the Mohnish Pabrai route - and now hunting for a good car loan deal. Let’s see where life takes us ahead.

[Lobogris]

This is a tricky question. Personally, I don’t take loans to buy cars. The feeling of not having an EMI or avoiding the hassle of getting a loan more than make up for any putative lost opportunity cost. My personal view is that most people won’t be able to make much more than the interest they pay on the loan despite assuming that they could do better. People who have good financial acumen and discipline should already have saved, invested and built up enough capital that spending say 20 lakhs for a car should mean nothing to them. Those who don’t even have at least 1 crore in savings should not assume they are financially savvy enough to be able to beat the banks that loan them money. Maybe 10 people out of a 100 might succeed in making a little extra by using the funds but the majority is not likely to do so. Of course there can be exceptions like a young professional just starting a career and not having saved much yet.

[shankar.balan]

Its sensible to use the Bank’s cash to buy a car. 3 years or 5 years or 6 years. Reasonable down payment of about 30-40% from own money. Rest on loan. However the EMI in my book shouldnt be more than 10-15% of the nett monthly income.
A loan allows the person to keep his/ her own capital intact and in high growth investments, which exceed the interest rate levied on the car loan. And paying smaller amounts monthly is quite affordable. But the big thing here is that the EMI really ought not to be more than the percentage of nett income as mentioned above.

[Nalin1]

Originally Posted by Lobogris

This is a tricky question. Personally, I don’t take loans to buy cars. The feeling of not having an EMI or avoiding the hassle of getting a loan more than make up for any putative lost opportunity cost. My personal view is that most people won’t be able to make much more than the interest they pay on the loan despite assuming that they could do better. People who have good financial acumen and discipline should already have saved, invested and built up enough capital that spending say 20 lakhs for a car should mean nothing to them. Those who don’t even have at least 1 crore in savings should not assume they are financially savvy enough to be able to beat the banks that loan them money. Maybe 10 people out of a 100 might succeed in making a little extra by using the funds but the majority is not likely to do so. Of course there can be exceptions like a young professional just starting a career and not having saved much yet.

I am with you here. I sacrificed whatever little you might make extra by using the funds, for the below-

No hypothecation and no charges for again removing it.
No paper work and bank procedure hassles.
No EMI every month for months together. (Prepaying and closing early means still a huge amount is paid in bulk. In that case you could have not opted for the loan )
Faster delivery.

[vedirah]

Putting down the entire cost of a car, in my opinion, is a foolish thing to do financially. You will be putting down your savings in a depreciating asset. Instead, I'm of the opinion that you take loan for how much ever EMI your cash flow allows at the lowest interest rate you can get. The remaining money (car value - loan) should be put into a mutual fund where you can get the maximum returns over a period of 5-7 years. Net-net you will be earning the difference between the interest of the EMI vs the interest of your investment. Worst case it will break-even.

For example, let us say you have Rs. 10 L with you to purchase a car. One scenario would be putting down the entire 10L on the car. The other scenario would be taking a loan for, say, 9L with 1L as downpayment. You put the rest 9L that you have as savings into a mutual fund. Assuming a 7% interest rate on the car loan of 9L, over 5 years you will be paying an extra Rs. 1,69,000 as interest. By investing the rest 9L that you have in a mutual fund, assuming a 12% return over 5 years, you'll be making a whopping extra Rs. 6,86,000! Net-net you have Rs. 6,86,000 - Rs. 1,69,000 = Rs. 5,17,000! That is a whole lot of money!

The key here: Always use someone else's money on a depreciating asset. Use your own money only on an appreciating asset.

[marathp]

Originally Posted by Nalin1

I am with you here. I sacrificed whatever little you might make extra by using the funds, for the below-

No hypothecation and no charges for again removing it.
No paper work and bank procedure hassles.
No EMI every month for months together. (Prepaying and closing early means still a huge amount is paid in bulk. In that case you could have not opted for the loan )
Faster delivery.

This can be achieved by taking an overdraft on your fixed deposit. You just pay extra 1% more than your FD interest rate. You can payback as you like it as long as the FD is in effect. I used it last time and found it more useful than utilising your funds at one go.

[mathur2012]

I have booked Jimny which is going to be third car purchase in last three years. Both of the previous cars were bought on full cash payment.

Although for Jimny I do have the money to buy it at cash payment but I was calculating whether parking that money in FD and taking loan will be better or buying it at full cash.

I did some calculations and it seems buy a car on loan is better, though I am not sure.

For sake of calculations,
The car price has been set to 10 Lakhs, Also say I have 10 Lakhs in hand to buy the car in cash
Salary = 1lakhs.
Salary Return = 2.7%(Savings account Return)
Car Loan Interest = 8.55%,
FD Interest Rate = 6.5%
Tenure = 5 yrs
With Down payment amount of 1 Lakhs, loan amount will be 9 Lakhs Thus EMI for 5 yrs 18,487 Rs



Edit: Sorry The last row got obstructed by the watermark, well it states Money I have with me after 5 yrs

You can see at end of 5 yrs I have 40K more in my hand if I purchase the car on loan, not to mention that this is minimum return. The actual returns can be better e.g. at the moment I am getting 6.75% FD ROI for 5 yrs( But I only used 6.5% in my calculations)
Infact this money can also be invested in MF for much better returns. Also the fact of having 9 Lakhs in hand and not being broke.

As per the above calculations loan over cash seems better but I have a feeling I am wrong somewhere, Can anyone shed some light where I am mis-calculating anything?


PS : There's no issue of any tax on FD return here as the FD is/will be in an account which doesn't come under taxable income. So the returns will be tax free.


However we if buy the car in cash and instead of paying EMI we use that EMI money to invest in RD then its a different story.



Edit : What if FD+RD+Loan?

Well here it is



seems like car loan is the better financial decision what do you guys say?

[Lobogris]

Originally Posted by mathur2012

As per the above calculations loan over cash seems better but I have a feeling I am wrong somewhere, Can anyone shed some light where I am mis-calculating anything? seems like car loan is the better financial decision what do you guys say?

There seem to be an error in the calculations. Firstly, you will have to pay Rs 1 lakh as down payment. So you will only have 9 lakhs left to invest in the said FD. So that will reduce the return on the FD. When you are getting 6.5% but paying 8.5% to the bank, how can you expect to earn more by paying an extra 2% in interest? If you simply kept paying yourself each month, you will do better and not have to deal with the hassle of a loan. Personally, I never take a loan to buy a car or even a home as the hassle in not worth it for me. Even if I somehow end up saving 40k over several years, that is a relatively small amount considering the hassle. The only exception is if you are trying to build up your credit status or have no other funds available and thus want to keep those 9 lakhs as a cash reserve. Personally, I would still use those 10 lakhs and start building up my reserve again each month.

[mathur2012]

Originally Posted by Lobogris

There seem to be an error in the calculations. Firstly, you will have to pay Rs 1 lakh as down payment. So you will only have 9 lakhs left to invest in the said FD. So that will reduce the return on the FD. When you are getting 6.5% but paying 8.5% to the bank, how can you expect to earn more by paying an extra 2% in interest? If you simply kept paying yourself each month, you will do better and not have to deal with the hassle of a loan. Personally, I never take a loan to buy a car or even a home as the hassle in not worth it for me. Even if I somehow end up saving 40k over several years, that is a relatively small amount considering the hassle. The only exception is if you are trying to build up your credit status or have no other funds available and thus want to keep those 9 lakhs as a cash reserve. Personally, I would still use those 10 lakhs and start building up my reserve again each month.

I too also thought there must be some mistake in calculations but it seems there isn't.

Firstly about the 1 lakh down payment and 9 lakhs left for FD you said. Well the FD returns are calculated on 9 lakhs only.

2nd I also thought how can I get more return when I get 6.5% on FD and pay 8.5% on loan. The answer to this is that 6.5% return is on 9 lakhs which remain constant for 5 years. Whereas the loaned amount(principal) on which 8.5% I need to pay interest keeps decreasing every year. Thus if we calculate CAGR for overall loan tenure it comes around 4.5%-5% whereas I am getting 6.5% return .

That 40k is the least amount saved, with current 6.75% FD rate or investing in long term MF we can get much more savings.
But
I agree with you, just for sake of mental peace, no hassles and liabilities I too have never opted for loan in my life.

[One]

Originally Posted by mathur2012

I did some calculations and it seems buy a car on loan is better, though I am not sure.

seems like car loan is the better financial decision what do you guys say?

If you have the equivalent cash in hand, then a car loan can potentially work cheaper than paying outright. You pay loan amount on reducing principal whereas you get interest/ returns on your cash in hand.

"Potentially" because the calculations will also need to consider tax implications on the interest/returns on the cash in hand.

Your conclusion is on the right track - if cash is available, taking equivalent loan is preferable while deploying the cash properly.

[red_nemesis]

Originally Posted by mathur2012

2nd I also thought how can I get more return when I get 6.5% on FD and pay 8.5% on loan. The answer to this is that 6.5% return is on 9 lakhs which remain constant for 5 years. Whereas the loaned amount(principal) on which 8.5% I need to pay interest keeps decreasing every year. Thus if we calculate CAGR for overall loan tenure it comes around 4.5%-5% whereas I am getting 6.5% return .

Thanks for sharing this interesting analysis, but I beg to defer.

There are 2 fundamental flaws in your comparison.

First, you are comparing FD returns against the loan repayment but you are not paying off the loan from FD amount.

You should compare the loan option against the source of your EMIs, which would be salary as per my understanding of your post. Hence, you should compare the post tax returns on equivalent amount from salary if you had invested it instead of paying the EMI (which is RD in your case). So, in case of RD, if you calculate returns considering upfront payment of 1 lakh and interest loss on that it would come out about negative 40-60k as you calculated. Hence, not better financially.

Second, you are totally disregarding time value of money. 10 lakhs in hand at the end of 5 years could mean anything. It could be 0 untill 4 years and 10 lakh at 5 year mark OR 9 lakh at end of year 1 and the tenth coming only in 5th year. Both are drastically different from each other.

So basically, paying cash might be better financially (only because your alternate returns are less than loan rate). But loan gives you extra cash at hand which can come handy in emergency, or can be invested in other options to earn better returns than loan.

I would personally go with a loan, probably with a little more down payment (30-40%) of value with an option to prepay and enjoy the assurance that come with extra liquidity.

But to each his own.