[rajathv8]

The loan is a better option until you factor in tax on interest earned.

[Aldo280]

Originally Posted by mathur2012

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.

Great idea which got me thinking on the numbers for my impending car purchase.

However wish to add just one thing here. In the IT Act, there is such a concept called clubbing of income. If the tax department decides to verify the source of the FD of Rs. 9 lakh and that turn out to be your funds and not of the person in whose name you have taken the FD, they can club the interest income to your income and it will be taxed in your hands.

[Everlearner]

The only way loan works out cheaper than cash is if you get tax benefit on the loan EMI as in the case of car lease.

[antz.bin]

Do consider that if you don't spend the money and don't beat inflation, you lose money if you keep it. Any asset class that beats inflation does so with a minimum investment period of over 5 years. 10 Lakhs today buys you a lot less than what 10 lakh bought you in January 2018.

Also consider the fact that Loans on EVs have tax benefits under section 80EEB

Car loan these days is around 8.5% and Inflation is also around the same. Anyways you are getting the funds at the rate of Inflation. With a tax deduction of 30%, this interest goes down to under 6%. This interest rate is literally cheaper than saving the amount yourself in an RD.

Taking the Nexon EV Max as an example:

The very top end variant costs 21.24 Lakhs On road, Pune.
SBI is currently offering EV Loans up to 100% for 8 years (1 more than ICE loan) at an interest of 0.25% lower than ICE cars.

For a 5 year loan on 100% finance, your monthly payment is:
₹43,577 for 60 months.
Total interest paid = ₹490,626.75

But since this interest is tax deductible, you saved ₹1,56,019 spread across 60 months or
about ₹2600/month. This savings is actually higher in the initial months at almost 4.5k per month for the 1st year but for ease of calculation, lets average it to ₹2600/month.

So net outgo is about ₹41000 per month to own the Nexon EV MAX 7.2kW XZ+ Lux.

If you save the same 41000/month in an RD for 5 years in HDFC bank for 7.25%, you will be at ₹29,54,381.
But since about ₹4,94,381 of this amount is taxable interest so you will lose around ₹1,57,213 in taxes and the net amount you receive is ₹27,97,167. Maybe slightly less since I have not deducted taxes every year.

Can we be absolutely sure that the Nexon EV that is now 21.24Lakh will still be less than 28 lakh in 2028? Considering 6.5% nominal inflation for 5 years, the required amount will probably increase to 29 lakh. So that is 1 additional lakh rupees required to buy the exact same car.

Also, the additional cost here is that you continued using your ICE car all this while spending more on fuel. That also needs to be accounted for.

Net Net: If you buy the Nexon EV Max Top End on loan NOW vs save the monthly amount in RD and buy it in 5 years, you get the car now instead of 5 years later AND save ₹1 lakh and fuel costs for 5 years in the process. This is true for any EV right now.

[Altocumulus]

Originally Posted by Malyaj

To all those who are saying that the interest is paid on a reducing balance, please understand how the EMI is arrived at. The interest rate quoted is implicit, it is not calculated every month on some reducing balance. To those who understand finance, the interest rate is the IRR on the loan from the Bank's perspective and applies to the entire tenure of the loan. If you sit and calculate the effective interest for every month, it will be highest in the first month and lowest in the last month. The interest rates thus calculated are meaningless by themselves.

So please understand that if you are taking a loan that carries 8.5% interest, you are paying 8.5% interest. Period. There is no reducing balance. That concept applies on corporate loans which are structured in a specific way. It does not apply on EMIs. So taking a loan is better only if you can guarantee yourself a way of earning more than 8.5%. You don't need an excel sheet to arrive at this decision. It is a mathematical concept that holds true at all points in time. You may want to take a loan despite the economics suggesting so for other reasons, such as to have contingency funds in your hands. But that is a non mathematical reason.

Lastly get rid of the notion that you can park money in a non-tax paying person's account and avoid tax on FD. Income tax will subject it to gift tax (any amount in excess of Rs 50,000 in a year) and the only way to avoid it is for the gift giver to pay tax as per his/her income tax bracket on the returns from the FD. In todays age, IT department has all information and you cannot indulge in this.

Calculate the total outflow incase of a loan across 7 years and the total inflow in case the same amount is put in FD at the end of 7 years. You will get the difference.

Example as mentioned above by me: 10L loan at 8.5%, I have to pay back a total of 13.3L to the bank. Use any amortization calculator you will get the numbers.
Same 10L I put as lumpsum in FD at 7% will give me 16.25L at the end of 7 years.

Even if I take it as I will be taxed at 30% for the interest, at the end of 7 years I will get 14.37L (Tax of 1.87L on the 6.25L interest I got). Still I will get back more than what I paid as Principal + Interest over 7 years.

However I will put it in ELSS. In ELSS I can assume a conservative growth of 12% average. That will take the total amount after 7 years to 22.87L. However it is LTCG so I will be taxed at 10% only. So end amount in hand after 7 years will be 21.6L.

[Malyaj]

Originally Posted by Altocumulus

Calculate the total outflow incase of a loan across 7 years and the total inflow in case the same amount is put in FD at the end of 7 years. You will get the difference.

Example as mentioned above by me: 10L loan at 8.5%, I have to pay back a total of 13.3L to the bank. Use any amortization calculator you will get the numbers.
Same 10L I put as lumpsum in FD at 7% will give me 16.25L at the end of 7 years.

Even if I take it as I will be taxed at 30% for the interest, at the end of 7 years I will get 14.37L (Tax of 1.87L on the 6.25L interest I got). Still I will get back more than what I paid as Principal + Interest over 7 years.

However I will put it in ELSS. In ELSS I can assume a conservative growth of 12% average. That will take the total amount after 7 years to 22.87L. However it is LTCG so I will be taxed at 10% only. So end amount in hand after 7 years will be 21.6L.

This is a flawed understanding. In an EMI you are paying part of the principal along with every instalment. Therefore every month your outstanding loan decreases, to the point that in the last month the principal becomes zero. However when you are applying compounding on the FD, your principal remains same.

Another way to think of this is from the bank's perspective. As if the bank is investing in an FD for 7 years at an interest rate of 8.5%. How much would the bank hold after seven years? 17.7 Lakhs. Had they loaned on terms which said no principal repayment and all interest in one shot, this is what they would earn. This is an apple to apple comparison with your personal FD.

Just think, if it was more lucrative to put money in FDs, banks would be doing it (which they do), instead of loaning it to people.

[Altocumulus]

Originally Posted by Malyaj

This is a flawed understanding. In an EMI you are paying part of the principal along with every instalment. Therefore every month your outstanding loan decreases, to the point that in the last month the principal becomes zero. However when you are applying compounding on the FD, your principal remains same.

Another way to think of this is from the bank's perspective. As if the bank is investing in an FD for 7 years at an interest rate of 8.5%. How much would the bank hold after seven years? 17.7 Lakhs. Had they loaned on terms which said no principal repayment and all interest in one shot, this is what they would earn. This is an apple to apple comparison with your personal FD.

Just think, if it was more lucrative to put money in FDs, banks would be doing it (which they do), instead of loaning it to people.

Please show me the flaw with numbers my friend. Please take some time out and open an EMI Calculator and an FD calculator and an MF Calculator and calculate yourself with the same amount of 10L. You will get the answers yourself.

Banks dont utilize money deposited in FD just for giving loans. There are multiple sources in the market they invest in where their returns are way more than what they give. In short they diversify, and loans is just one area.

Think about credit cards. You get 52 day interest free period. I always utilize that and pay off totally at the end of the month. 0 annual fees plus I get thousands of points which I redeem every year. All for free. Why do banks do that, clearly it is a loss for them.

[Malyaj]

Originally Posted by Altocumulus

Please show me the flaw with numbers my friend. Please take some time out and open an EMI Calculator and an FD calculator and an MF Calculator and calculate yourself with the same amount of 10L. You will get the answers yourself.

Banks dont utilize money deposited in FD just for giving loans. There are multiple sources in the market they invest in where their returns are way more than what they give. In short they diversify, and loans is just one area.

Think about credit cards. You get 52 day interest free period. I always utilize that and pay off totally at the end of the month. 0 annual fees plus I get thousands of points which I redeem every year. All for free. Why do banks do that, clearly it is a loss for them.

I have used an EMI calculator and I am not disputing your figure of 13.3 L as the repayment. Here is the link to what I used.

https://emicalculator.net/

What I am saying is this figure of 13.3 L is based on the fact that your principal is reducing every month. That principal repaid every month is akin to downpayment of the car. This is another way of saying that you took a loan of less than 10 lakhs and this figure keeps going down every month.
This principal that you repay has an opportunity cost.

Banks can afford to offer you interest free credit period because they earn fees from the retailer for every transaction. When I was a merchant, I used to pay 2.5% of every credit card transaction as fees to ICICI Bank. On the other hand, assuming that a personal loan interest rate is 12% per annum, an interest free credit period of 30 days (most common) amounts to interest loss of 1%. Thus the bank makes net 1.5% on every transaction. You can imagine how much they make over millions of transactions. Add to it the fact that they pay the merchant after a week whereas they get the funds from the buyer on the same day.

[The Observer]

I may have missed, but I did not notice you considering Inflation and the residual value of your car at the end of the loan period.

Please factor in inflation to understand if via FD, the amount after 5 years is same as the amount you have in cash right now.

Unless you are beating inflation and FD's generally do not, you are losing money.

[mathur2012]

Originally Posted by rajathv8

The loan is a better option until you factor in tax on interest earned.
Attachment 2410069

FD with 5 years tenure are tax saving FDs.

[rajathv8]

Not all 5Y FDs are tax-saving.
If one opts for a tax-saving FD, there is a lock-in period of 5 years which removes liquidity -one of the advantages of FD.
About the tax-saving part, only the principle amount invested is eligible for tax deduction and that too is capped at 1.5L per annum. The interest earned is taxable.
One could invest 1.5L out of the 9L in tax-saving FD and save on 30% tax but this adds value only if you have not used the Sec80C already for PF, ELSS etc.

[androdev]

Imagine being capable of doing amazing financial calculations only to conclude that one can profit by putting money in FD and taking a loan for the same amount.

[rx100]

Originally Posted by mathur2012

Won’t argue much with you, Will only say you are wrong here, how? Well,go through the thread. Have a great day ahead again.

Have a great day! and don't want to drag it further, but on a closing note, the table I put up above clearly shows the inflows and outflows and the final outcome. The numbers in positive is your earnings and negative ones are the spending.
Attachment 2409883

Originally Posted by Altocumulus

Please show me the flaw with numbers my friend. Please take some time out and open an EMI Calculator and an FD calculator and an MF Calculator and calculate yourself with the same amount of 10L. You will get the answers yourself.

Banks dont utilize money deposited in FD just for giving loans. There are multiple sources in the market they invest in where their returns are way more than what they give. In short they diversify, and loans is just one area.

Think about credit cards. You get 52 day interest free period. I always utilize that and pay off totally at the end of the month. 0 annual fees plus I get thousands of points which I redeem every year. All for free. Why do banks do that, clearly it is a loss for them.

What we are forgetting is the time value and opportunity cost. Although your outflow is a static figure of 13.3L, the emi paid on 1st month is not the same value on 84th month and so on, and we need to factor in that.

If things were as simple as taking a 10L loan @ 8.5% and investing back the same @ 7.5% in an FD, and earn a cool 3L free money after 7 years, everyone would do that. Why we have to take risky investments when there is free money is available.

[Schneller]

Originally Posted by androdev

Imagine being capable of doing amazing financial calculations only to conclude that one can profit by putting money in FD and taking a loan for the same amount.

The comment i was looking for. Looking through the discussion, reading 70% of comments has made me dizzy. There is alot of mental accounting going on. You can budget your monthly expenses as per an EMI/RD/SIP. But at the end of the day, everyone is talking about investing additional money apart from the loan amount. You take a 9L rupee loan and do a 9L FD, you are still going to be paying the bank their EMI. Doing the FD makes an additional investment of 9L in this mix. I.e. total outflow of 9L FD + regular EMI.

If there is a difference in interest rates, you cannot earn more than the outflow

FYI - Mental accounting = Mental accounting refers to the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results. Mental accounting is a concept in the field of behavioral economics. (Investopedia)

[Malyaj]

Originally Posted by Altocumulus

Please show me the flaw with numbers my friend.

@Altocumulus, further to my post#188, please see the attached excel sheet.

First let's make it simpler. Let's assume the loan period is 1 year.
As per the EMI calculator you will pay Rs 10,46,637 being the sum of 12 EMIs (See attached link).

https://emicalculator.net/share/?shortURL=7c6e2396eb

Whereas if you put the amount in an FD you would earn Rs 10,70,000. This is simple -> 1000000*1.07. No need for calculator.

Sounds too good to be true?

Let's say you are a farmer in a village and go to the local money lender, who agrees to lend you at 8.5% and says you should repay the entire loan at the end of the year with interest. How much would you repay? Rs 10,85,000. This is how lending used to work when there were no EMIs.

So what is happening here? Is it that 8.5% in EMI format makes the bank worse off than 8.5% in the old format? Also, does it mean that an 8.5% loan is effectively a 4.6% loan? How is that possible? It isn't.

When you repay the bank under EMI model, they have received part of the principal earlier than in the moneylender model. Whereas you have parted with your money sooner than you would have in the moneylender format.

Now let's come to the excel sheet.
Let's assume the loan is taken on 31st Dec of any year and the 1st EMI is due on the 31st of Jan next year, then 28th Feb and so on, until the last EMI is paid on 31st Dec. The first EMI you have paid on 31st Jan loses out on 11 months of interest it could have earned compared to the moneylender format where you don't pay any EMIs. Similarly the EMI paid on 28th Feb loses out on 10 months of interest. These are opportunity costs, or time value of money. Totally you lose out on Rs 34,241 in opportunity costs. Hence your total outgo is 10,46,637 + 34,241 = 10,80,881. This is assuming that you could have earned 7% in FD.

Now see this from bank's perspective. Every EMI they receive they can be reinvested. Let's believe the bank thinks it can earn 8.5% everywhere. Replace the 7% in cell C2 with 8.5%. Now the total becomes 10,88,394, or a return of 8.8394%. In other words, 8.5% in the EMI model is equal to 8.8394% in the moneylender model. If you were to approach the bank to offer you a loan according to the moneylender model, they would charge you 8.8394% and not 8.5%. But that is besides the point.

The point is what I made in my original post, that all this excel calculation is not required. It is mathematically not possible to be better off by taking a loan at 8.5% and earning an FD interest of 7%, or anything less than 8.5% for that matter.

[ATTACH=EMI_TEAM-BHP.xlsx]2410184[/ATTACH]