[Lobogris]

Originally Posted by 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.

Anyone with such good “prudent investment skills” should already have amassed a sufficiently large corpus where 10 lakhs would seem like a minor amount. If a person doesn’t have even 20 lakhs accumulated then it is safe to assume that he or she doesn’t have extraordinary investment skills. The only exception is a young person at the start of his or her career.

[hemj]

Basically, between cash and loan, there is a very small percentage of people in this country, that can afford to pay cash upfront and not be worried about it.

There are a group of people, who hate loans and save up and buy with cash upfront. To these people, I would say they should assign value to opportunity cost and then decide. Eg, If you are buying a car for leisure, touring etc, then pleasure is what is lost. For someone who is going to use the car to run a taxi, drive to office, then the value lost is so much more than gained by peace of mind. But, to each their own.

I have made a small calculation on a paper, and I would like got others to verify my numbers. I have taken
Inflation @6%
Interest @8.5%
Tax @30%
Loan for 5 yrs.
I have only calculated the inflation adjusted money that would be paid in each situation. I have not calculated the returns which you may get on taking a loan, and using the money as investment, because I believe that is a very small percentage.
I'm not drawing a conclusion because, that would be my individual situation, and each person has a different financial situation.

[Schneller]

Originally Posted by fjcruiser08

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

Meaning no disrespect to the OP, i am very patient in explaining this as i had the very same thought process when i was 15 I understand where the confusion comes from, we see money on nominal terms and just inflow / outflow. These are the tactics salesmen use to lure you into buying their financial schemes and i’m personally against the practice of misrepresenting finances by using different words and situations when selling products, hence very understanding of these situations. A little bit of excel is what you need to calculate such situations 99% of the time.

[Achu]

Taking a loan may be a necessity for various reasons, cashflow, scarcity of funds, other competing funds requirements being some of the reasons.

There are some assumptions that need to be taken while doing an analysis of this sort. Firstly all things have to be equal. There needs to be the same amount of money for both analyses. If an amount of 10 l is taken to buy the car upfront, there is a loss of opportunity cost for that amount. That loss of opportunity cost is the same as the return on FD / MF investments.

However, if a loan is taken and an FD / MF be put for the amount of 10 lakhs, the same opportunity cost against each EMI payout needs to be calculated. This can be done on Excel, with interest loss for each EMI from the date of debit upto the end of the loan tenor.

Once this is calculated, there is no way that a bank loan can give more returns than own funds, unless the return on own investments exceeds the interest on the bank loan. That no doubt can happen, but it is not a guarantee and certainly not through investments in FDs, tax free or otherwise.

[KSTejaswi]

Sorry if I'm side-tracking the discussion, but I have a practice that I follow for smaller purchases, like mobile phones.

Let's assume I want to buy a phone worth 40k in 3 years. I start saving money in an RD, for a sum of 50k, in the same time frame. At the time of purchase, I pay via credit card, take the time and whatever points it allows me, then take a loan against this 50k FD and pay the card, continuing to repay the loan while the FD continues to accumulate interest (my loss is ~1%). At this time, I expect to be earning more than today, plus, the same amount that I save monthly now should pinch me a little less then.

In this combo, I feel I will have my phone and my money. I know, the interest, opportunity cost and tax will eat away some of this benefit. But when I'm done paying back the loan, I still have an FD.

I follow this method for smaller payments like insurance renewals and the like. It also helps serve as a timely reminder and I'm comfortable ignoring monetary benefits on these relatively smaller sums, considering that I don't have to be burdened with sudden credit card swipes.

I have two queries now:
1. How bad is this method? How much am I losing?
2. If it isn't so bad, could it be another option for the OP?

Thank you all in advance.

[Cresterk]

Originally Posted by KSTejaswi

Let's assume I want to buy a phone worth 40k in 3 years. I start saving money in an RD, for a sum of 50k, in the same time frame. At the time of purchase, I pay via credit card, take the time and whatever points it allows me, then take a loan against this 50k FD and pay the card, continuing to repay the loan while the FD continues to accumulate interest (my loss is ~1%). At this time, I expect to be earning more than today, plus, the same amount that I save monthly now should pinch me a little less then.

Why are you taking a loan against the FD instead of just closing it out or choosing an FD that matures in 3 years? You are paying a 1% interest fee to the bank to use money that you already have. Not only that, you continue to pay taxes on the FD so your overall interest rate on this loan will be higher than 1% (depending on what income tax bracket you fall under)

The first part is a decent financial move, especially with the credit card.

[rajeevsulu]

I have a simple method to use when I want to buy gadgets. Most credit cards offer no cost emi schemes of upto 9 months. I buy the gadget, opt for no cost emi and pay it of in 6 or 9 months. I go only through the no cost emi route as it helps split the bill up over a spread of 9 months. Can i afford to buy the phone paying cash, yes, I can? Why do i do this, I have no idea!

[Nalin1]

The way this thread has been going around in circles shows there is no easy answer to which is the better or financially more prudent.

Easy answer- If you have enough resources to make full payment and can afford, go for it.

If you need the car immediately, but not financially strong enough to make the full payment, but can afford to pay monthly EMI's, go for loan. But in this scenario, if car is not an immediate requirement, build up to the cost slowly and purchase once ready with full payment.

[rkmountain]

Get Loan Against Time Deposit Online in India | SBI - Personal Banking

If I have the FD, has somebody tried the SBI facility of loan against deposit. Any first hand experience of it

[rkmountain]

Which is better
1. Car Loan - SBI
2. Loan against FD - SBI

can someone good with numbers help me do the math . Consider I get the loan (car loan vs loan against FD) of 10 lakhs - duration 5 years

[Lobogris]

Originally Posted by rkmountain

Which is better
1. Car Loan - SBI
2. Loan against FD - SBI

can someone good with numbers help me do the math . Consider I get the loan (car loan vs loan against FD) of 10 lakhs - duration 5 years

No math is required. For a loan against FD, you will pay 1% to SBI to use your own money. While the loan is active, you will not be able to encash that FD or use it in any manner. So a loan against FD makes absolutely no sense. A loan makes absolutely no sense if you have funds available to cover the purchase. Simply start saving the amount you would have spent on EMIs and build up your savings again. The only time if makes sense is if the FD is about to mature and you need the money for a short period and would then use the FD to pay it off.

[Anikethan]

I became curious about the topic and enjoyed reading through the calculations provided by everyone. The perspectives presented were quite interesting. Based on my professional experience, the most appropriate approach is to consider the Net Present Value (NPV) of future cash flows.

Rather than focusing solely on the savings or cash outflows at the end of the fifth year, the NPV method takes into account the present condition of everything. Please refer to the calculations in the attachment, which show that buying with cash is a more prudent and favorable option.

To summarize, if the payment is made in cash, the present value will be -10.00 L (negative because it represents a cash outflow). If a loan is taken, the present value will be -10.21 L. Therefore, it is more advantageous to use cash.

[Udos_Gunner]

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.

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.

I understand what you are trying to say. Now consider this situation where you have, say, 20Lakhs in FD. You are planning to get a car for 10Lakhs. Given this scenario where you have enough in your arsenal and can afford to take the car home in a single payment, would you rather break the FD and pay in full or let it run the course and take a loan?
The current Car loan rate is 8.7%, FD Interest rate is 7%. Consider loan tenure to be 3 years.

I understand that by doing NPV calculation, paying in full is better. I wanted to know that even if I pay more in the loans, would the interest earned in FDs offset it.

[Schneller]

Originally Posted by Udos_Gunner

The current Car loan rate is 8.7%, FD Interest rate is 7%. Consider loan tenure to be 3 years.

I understand that by doing NPV calculation, paying in full is better. I wanted to know that even if I pay more in the loans, would the interest earned in FDs offset it.

Truth be told, i feel finance is deliberately made complicated so that people in the industry can milk others. Fact of the matter is, the same 10 lakh rupees will never give you the profit if u put it in an FD. The only way towards profit is to earn a higher % than the loan rate.

Say u have 20 lakhs, if u take 10 lakhs loan, you obviously will earn a profit in money terms because your capital amount is double. But, if you were in a situation where buy on cash and do an FD for the remaining 10 lakh, you would earn the most amount of profit.

It is simple - Anything above 8.7% will turn a profit, anything below will turn a loss. Given that u don’t have a 3rd income source and were only talking about the money u have

[nidhikapoor]

Is it really true that if you buy outright without a loan, it will attract income tax scrutiny? That seems silly. Money is going from bank not cash.