[vvivek85]

Did some basic math calculations between loan and ready cash, and I am getting a whooping 1.5L savings if we go for a loan instead of ready cash. Please correct me if I missed factoring any specific item.

[Schneller]

Originally Posted by vvivek85

Did some basic math calculations between loan and ready cash, and I am getting a whooping 1.5L savings if we go for a loan instead of ready cash. Please correct me if I missed factoring any specific item.

The specific item is you essentially are paying EMIs and doing an FD at the same time. In proper finance, to find the best solution, you need to forget the mental accounting that you will pay EMIs from your future salaries.

You need to consider the 10 lakh rupees as the only available source of money. Nothing coming in nothing going out. Now essentially you need to do a 9 lakh FD but at the same time take out monthly EMIs from it too. Your principal here also goes down with time. Guess what would happen? You will still pay interest and paying outright on cash will be cheaper.

This is of course on nominal money terms and i will avoid getting into real money terms to keep it simplistic.

Everyone here is calculating that they will pay 1 lakh down + 9 lakh Fd and also keep paying EMIs.

The comparison is being done on one hand with a finance requirement of 10 lakh vs a total finance requirement of 21-22 lakhs in the FD case.

[AZT]

Originally Posted by vvivek85

Did some basic math calculations between loan and ready cash, and I am getting a whooping 1.5L savings if we go for a loan instead of ready cash. Please correct me if I missed factoring any specific item.

The only qualm here is you'll need a spare 9 lakhs to park for 5 years and not touch it. OP said salary of 1 lakh so how much of this would go for car payment EMI.

A better way of looking at this would be, should you break an FD to buy a car or let it compound and just take a loan, assuming you can pay off the EMI's.

[Zanskar]

I have a situation that might be of relevance here. I’m planning to buy a car and will be selling one of my existing cars to enable that.
New car: 12 lakhs
Old car value: 7 lakhs
Savings in bank: 5 lakhs

I have a few options:

Option 1: Use the 7 lakhs and add another 5 lakhs from my savings to it to buy a car in cash.

Option2: Use the 7 lakhs as downpayment and take a car loan of 5 lakhs.

Option3: Put in a downpayment of 2 lakhs and use the remaining 5 to invest in mutual funds or similar. The savings of 5 lakhs remain as is in FD.

Which option makes the most sense financially? Did not do any calculations as I’m a total noob when it comes to finances.

[Scorpio80]

Originally Posted by mathur2012

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

I was in a similar situation when I bought my car couple of years back. I ended up taking a loan. The only difference in my case was that all my money was invested in Mutual Funds.

Being a numbers nerd, I tracked
(i) the returns on the investments that I would have sold to buy the car outright
VS
(ii) what I would have earned if i had bought the car outright and invested the EMI in mutual funds

The difference of the two is 13%+ annualized over a 2 year period, much higher than the 7.5% fixed loan interest I am paying.

I am very happy with my decision of taking the loan.

PS: Regarding FD/RD, I agree with some of the folks that with tax, you will end up paying more (as the money for EMI needs to come from the FD invested).

[Maky]

Originally Posted by mathur2012

The answer to this is that 6.5% return is on 9 lakhs which remain constant for 5 years.

Unless I am mistaken the x% Interest on an FD is not constant but compounding in nature. The final post-tenure amount should be higher.
Do correct me if I'm wrong and it is indeed simple interest instead.

[mathur2012]

Originally Posted by Maky

Unless I am mistaken the x% Interest on an FD is not constant but compounding in nature. The final post-tenure amount should be higher.
Do correct me if I'm wrong and it is indeed simple interest instead.

You are correct.
By constant I meant that the 9 lakhs principal is constant(not constant infact but actually increasing by compounding interest) and the principal in case of loan is decreasing.

So even with 8.55% roi on loan we pay less interest than what we earn on FD with only 6.5% roi.

[FlankerH]

Originally Posted by mathur2012

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 you guys say?

There is one crucial aspect missing here or may be someone mentioned i missed, which is:
Tax on FD interest which should be as per applicable slab.
Further if you pay upfront and later park the same 18k / month in SIP or RD you will end up with heigher return as its all principal.

[mathur2012]

Originally Posted by FlankerH

There is one crucial aspect missing here or may be someone mentioned i missed, which is:
Tax on FD interest which should be as per applicable slab.
Further if you pay upfront and later park the same 18k / month in SIP or RD you will end up with heigher return as its all principal.

I have already considered/mentioned about both of the points in my OP.

[shibujp]

A loan is not going to be cheaper than a outright purchase. I think all points pointing towards that have been put forward by other members - so i don't want to belabour the point further.

Just wanted to point out that if you have 10 lakhs with you , you can put it into an fd and then open an overdraft account against that fd. SBI gives 90% of the fd amount changing you 1% over the fd interest. So if your fd interest is 5%, the money in the overdraft is charged at 6%. It's still a loan and interest is charged but the money you pay as interest is much less.

This is an option i have used many a times to fund even down payments on my cars.

Drive on,
Shibu

[fjcruiser08]

Originally Posted by Schneller

The specific item is you essentially are paying EMIs and doing an FD at the same time. In proper finance, to find the best solution, you need to forget the mental accounting that you will pay EMIs from your future salaries.

OP is talking of buying two cars at the same time: one for himself with monthly installments he pays to the bank, and one in cash for the banks use on which the bank pays him some fees at lesser % than he does to the bank for the first car.

I admire your patience; I would have given up after the first try

[livelyyoungman]

I always feel that car is a liability and it is better to take a loan to get one even if you have cash in hand. Interest rates for new car purchases are low and even if you are getting an used car you can opt for a Personal Loan. Used car Vehicle loan is higher than the one you get for new cars. Prudent investment of the amount in hand will help anyone to square off the interest that you pay and still make some good profit.

[sudeepg]

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?

If you are looking at this purely from a cost-outflow perspective, keep in mind that there's more to owning a car than just on-road costs. Personally, I think loan = paying more for a car than you'd pay with outright cash down payment, unless of course you get it on a lease, where you can claim tax benefits.

[SGK]

Been there on similar situation and I have purchased both my cars on loan ( Innova crysta and Celerio). I had sufficient funds in my savings as a part of MF, but done some basic calculations and realized purchasing via loan would be more beneficial.

Please do your calculation and based on your risk appetite please proceed.

[SolidSnake]

There are certain flaws in the calculations made by OP. Any day, upfront payment will be beneficial than loan unless you are running a business which can give you returns of more than 8-9 %.

Let’s see two scenarios :

You are buying a car worth 10 lacs on-road.

1) You take a loan for 100 % on-road(10 lacs) for 5 years with 8.5% ROI (Emi - Rs 20517) and park the 10lakh cash in a FD with 6.5% ROI.

You are paying 20517 x 60 months = Rs 12,31,020.
Your FD on maturity after 5 years will fetch you Rs 13,80,420. Hence, 13,80,420 - 12,31,020 = Rs 1,49,400 will be your savings if you opt for loan.

This emi of Rs 20,517 would have to be made each month from your salary or savings.


2) Second scenario is , you pay full upfront payment of 10 lakh for the car and invest in a RD ( Recurring Deposit) with 6.5% ROI, the amount of Rs 20,517 which would have been your EMI if you had taken a loan , you would get Rs 14,56,517 at the end of 5 years.

Hence, you would save Rs. 76,097 more if you pay upfront and invest in RD.

These calculations hold good only if you are salaried or don’t have any means of business to earn more than 8% ROI. If you are running a business or earn much higher than 8-9% with similar principal, then any day loan is better. Also, there are tax benefits for business and firms.