[alpha1]

Originally Posted by Rodie09

ROI for Loan is at 9% on monthly reducing basis, while for FD it is 6.9% on annual compounding basis. You can't just compare the two on face value. I hope you'd agree to that at least.

1) What do you mean by "Reducing basis" and "annual compounding basis" and what is the difference between the two?
2) What is the difference between Rs 20,000 given to you today vs Rs 20,000 given to you in the year 2028?

Originally Posted by Rodie09

And all of above is unwanted digression. Financially it is very clear that a 9% loan is a better deal so that you can keep your cash for a rainy day and also earn interest which will more than cover up for your interest outflow on loan. You got a new car and bank got good business. Fair enough.
I rest my case now

I sincerely hope you don't get duped by countless BFSI calls that offer you the sun, the moon and the stars at the lowest cost. (Whereas when you work out the correct math it actually costs an arm and a leg)

[TD_GHY]

While all our previous cars were either bought fully through own funds, or with very minimal loan amounts (1-2 year loans), all new purchases are done with maximum loan amounts. Since all new purchases are being done in name of a business concern, it helps to claim the interest as expenses, claim depreciation on the vehicle, and frees up money for working capital for other expenses like marketing, fuel etc. Also, it helps to maintain a good relationship with the banks, and they are always more eager to provide loans to previous loan takers with good repayment history.

[Rodie09]

Originally Posted by alpha1

1) What do you mean by "Reducing basis" and "annual compounding basis" and what is the difference between the two?
2) What is the difference between Rs 20,000 given to you today vs Rs 20,000 given to you in the year 2028?



I sincerely hope you don't get duped by countless BFSI calls that offer you the sun, the moon and the stars at the lowest cost. (Whereas when you work out the correct math it actually costs an arm and a leg)

It's okay mate. The jargon and sun, moon, leg and all the poetry doesn't help to prove any point without illustration. More so when you don't know what is monthly reducing and annual compounding.
Good luck

[avira_tk]

Originally Posted by Gansan

Simple. First calculate how much interest you will pay for the loan. Then calculate how much returns you can earn for the cash if you invest it - the norm is to use bank FD rates which currently rule around 7.25%. If the latter is less than the former, make a cash purchase. If you can employ the funds in any manner to earn more returns than the interest you will pay for the loan, then avail the car loan.

A caveat though. If we make a cash purchase, we should be left with a comfortable savings buffer even after the purchase. If the purchase will seriously dent the buffer, then one should take the loan even though the interest will be more than the returns one gets on their savings.

The second part of your post is the important thing, I think because most forum members are financially stable, big city people, they're used to having enough cash around to paying upfront for a car. This is not the case for the majority, a failed harvest or price crash is enough to wipe out a lifetime of savings.

This thread is directionless now, the question of how you buy a car has become how not to buy a car and invest your money, so you end up without a car.

[Lobogris]

Originally Posted by Rodie09

I find this discussion can be concluded pretty simplistically- looks like an open and shut case to me in favour of loan based on prevailing interest rates..

You are forgetting one important factor: the opportunity cost or interest earned on the EMI of 20,700 per month. You are assuming that you would keep this 10 lakhs you receive as a loan in a FD and earn interest on it and that this interest would be more than the interest you pay on the loan. However, you can’t just keep that 10 lakhs in its entirety for the loan period. You would either start reducing that amount by 20,700 each month or you would have to put in YOUR OWN EXTRA money to the tune of 20,700 each month in order to keep that 10 lakh FD intact. So you could have made a recurring deposit and deposited this 20,700 each month for the loan period and earned interest on it. This, here, is the cost of this scheme. It comes out at 2.5 lakhs for this period.

[govigov]

Did SBI stop the overdraft facility for car loan? My 2016 scross was bought using the overdraft facility and I have saved a lot on interest. Did SBI stop this scheme?

Which other bank is offering overdraft / max gain style car loan?

[rx100]

Originally Posted by govigov

Did SBI stop the overdraft facility for car loan? My 2016 scross was bought using the overdraft facility and I have saved a lot on interest. Did SBI stop this scheme?

Which other bank is offering overdraft / max gain style car loan?

Does the OD loan really help to save lots on interest? I thought there would be higher interest rates compared to normal loans and prepayment of loan would be better option than keeping it in OD account.

[govigov]

Originally Posted by rx100

Does the OD loan really help to save lots on interest? I thought there would be higher interest rates compared to normal loans and prepayment of loan would be better option than keeping it in OD account.

Yes, it does help as you can do lumpsum payments, like if you get a bonus or something and still have the flexibility of liquidity. The interest is charged only on the outstanding principal amount. So, if you do aggressive loan payments, the total amount, (prinicipal + interest) over the term of the loan is lower when compared to a conventional loan.

For example, if you are planning for a vacation that needs 2Lakhs, you can just park it in this account and then save on interest generated against this 2lakhs till you need it. This savings when compared to the 0.2% increase in the Loan amount for this type of loan is well worth it.

Interest is generated against the outstanding principal ONLY. Any amount over and above the regular monthly EMI is subtracted directly from the outstanding principal amount, thus reducing the loan burden while maintaing liquidity.

[nfs_2_GT]

Hi Everyone,
Very interesting thread especially as this thread got my team-bhp membership approved after lurking as a reader for the last 5 years and yes this is my first post. Now I am not sure if my calculations are absolutely spot on or not hence I need your input.

To compare the two cases we have to first define the asset and cash flow assumption of the buyer. The assumptions are:
1. Total post-tax assets of the buyer need to cover the cash payment of the vehicle
2. The buyer has a cash flow equal to EMIs for the loan term

The constants assumed are:
Car price 15lac, Downpayment 5lac, Loan 10L@9.5% for 3 years leading to an EMI of 32033, Tax rate 2%(there is a reason for this), return on investment 8.75% (or monthly 0.729%)

To make a post-tax down payment of 15 lac the buyer needs assets of at least 15.30lac (Unless the asset is held in just a normal savings account it will need to be withdrawn from some debt fund requiring some tax on withdrawal)

Now assuming the buyer has an exact asset of 15.30lac at the date of buying and he withdraws it to make the cash purchase from this moment on the process of comparison is quite simple.

In the case of a loan: The remaining asset grows by a monthly interest rate for 3 years (with these numbers the remaining asset of the buyer would be 10.2lac which would grow to 13.15lac at the end of three years)
In case of cash purchase: The EMIs are accumulated monthly and the same monthly interest is paid on the accumulated amount each month (with these numbers the final asset of the buyer would be 13.13lac at the end of three years)

So the final net worth of the buyer is higher in the case of a purchase by loan, although marginal in this case. But this number grows substantially if the buyer is withdrawing from a taxable corpus. With a zero tax liability for withdrawal, the cash purchase leads to better net worth at the end of the term(13.13 vs 12.89)
Both these net worth numbers are pre-tax at the end of the term so inflation and tax shouldn't be a factor in this comparison. (Although interest earned is higher in the loan case if we consider tax the initial calculations are heavily skewed in the favour of the loan)
So in conclusion, according to my calculations loan is certainly a better proposition as it comes with a very comparable number and the added benefit of enhanced liquidity. The concept of tax deferment also helps in skewing numbers in favour of loans. Feel free to ping me for the Google sheet to go our the calculations by yourself also.
Thanks for reading, I hope it was helpful.

[avira_tk]

Originally Posted by nfs_2_GT

Hi Everyone,
The constants assumed are:
Car price 15lac, Downpayment 5lac, Loan 10L@9.5% for 3 years leading to an EMI of 32033, Tax rate 2%(there is a reason for this), return on investment 8.75% (or monthly 0.729%)

To make a post-tax down payment of 15 lac the buyer needs assets of at least 15.30lac (Unless the asset is held in just a normal savings account it will need to be withdrawn from some debt fund requiring some tax on withdrawal)

So the final net worth of the buyer is higher in the case of a purchase by loan, although marginal in this case. But this number grows substantially if the buyer is withdrawing from a taxable corpus. With a zero tax liability for withdrawal, the cash purchase leads to better net worth at the end of the term(13.13 vs 12.89)

Thanks for reading, I hope it was helpful.

32k a month payments are possible only if you own your residence outright, there is no reason to pay down the loan in 3 years. The 3 year thing is relevant for depreciation benefits which aren't substantial after the third year. If you take that loan for 5 years, pay 21 in emi, you've got enough to pay for fuel, maintenance and insurance. Cars also require a rainy day fund when something will inevitable go wrong, this is crucial for younger buyers, older people would be more comfortable on this count.

[nfs_2_GT]

The objective of this thread was to answer the question whether buying a car is better by paying cash or taking a loan. I have tried to answer this question using my calculations without considering the other expenses. Also, the basic assumptions of selecting between these two choices requires the presence of both the cash flow and asset.
But you are correct in pointing out that this calculation may further shift in the direction of loan if we extend the loan for 5 years.

[capnemo]

Has anybody here made use of a 'loan against mutual funds' / 'loan against securities' ?
I am thinking of availing one to finance my car purchase. Just to be clear, I have investments in mutual funds that can finance the car purchase outright, but I do not want to disturb them (opportunity cost).
I am ok with a loan since I am very disciplined as an investor. So is my wife.

Here are a few points I found while researching LAMF:
Pros

1. Fully digital - No paperwork
2. No CIBIL score effect since it is a secured loan where you have pledged your securities (equity shares/mutual funds)
3. No pre-payment charges
4. No foreclosure charges
5. Car is in your name, not in the financier's name since it works similar to a personal loan basis. Hence no hypothecation removal / RTO process required
6. Rate of interest is 10.49 - 10.75% with the caveat that this is a reducing loan (meaning, it is applied to the outstanding amount only). Normal auto loans are usually flat loans.
   1. for e.g., suppose you need to avail a loan of 1,00,000 for 5 years.
   2. At a flat rate of 10%, the total interest you have to pay is calculated on the 100000 amount at the beginning of the loan tenure. In this case, it'll work out to 50,000 (10k x 5) - so total outstanding is 100000 (principal) + 50k (interest)
   3. With a reducing interest rate, if you are disciplined, you could make prepayments and have an equivalent flat interest rate of 4-6% interest rate (I have the excel spreadsheet to demonstrate it). Sample calculator here

Cons

1. Works only if you have a sizeable corpus since the line of credit is limited to 40-50% in case of equity, 70-80% in case of debt
2. Market downturns could bring down your equities after pledging and necessitate a sell-off
3. Your securities that are pledged have a lien marked on them, that prevents sell off until you've closed your loan
4. Lastly, tenures could be limited

I think that 4-6% interest rate is pretty nominal and am comfortable making both the interest + principal payments instead of equivalent EMI amounts on an auto loan.

Do the forum members have any advice / more probing questions ?

[nfs_2_GT]

Hi Capnemo,
Can you share the link to the excel? Would like to go through it and verify the numbers there. Post that I would be in a better space to comment.

[rx100]

Originally Posted by capnemo

Has anybody here made use of a 'loan against mutual funds' / 'loan against securities' ? .
[*]Rate of interest is 10.49 - 10.75% with the caveat that this is a reducing loan (meaning, it is applied to the outstanding amount only). Normal auto loans are usually flat loans.

When auto loans are available at around 8.5% why do you want to take loan at a higher rate. And FYI, auto loans are working on reducing balance basis only and SBI provides a fixed interest rate loan unlike the housing loan where the interest rates are reviewed every quarter.

[capnemo]

Originally Posted by rx100

When auto loans are available at around 8.5% why do you want to take loan at a higher rate. And FYI, auto loans are working on reducing balance basis only and SBI provides a fixed interest rate loan unlike the housing loan where the interest rates are reviewed every quarter.

Thanks rx100. I wasn't aware SBI was offering at a reducing basis. Atleast HDFC I know, is offering flat rate auto loans.

Peculiar thing about SBI that I discovered after your message - they're levying prepayment and foreclosure penalties, if done within a 2 year timeframe.

Pre-Payment penalty: -
Charges @1% on part payment amount (plus GST) will be
levied quarterly in Fixed Interest rate car loan if prepaid within
24 months from the date of disbursement.

Foreclosure Charges: -
Foreclosure charges for Car Loan under Fixed rate of Interest will be
recovered @3% on closure amount (plus GST) will be levied if foreclose
within 24 months from the disbursement of loan.

I need to re-work my estimations in this case, because a ~2% difference between auto-loan and LAMF is too high.