[amoghchaphalkar]

As long as the total purchase value of the car is not more than 25-30% of your post-tax annual income, it really does not matter if it is a loan or an outright purchase.

[KiloAlpha]

First, let us understand what a car is, from the perspective of an individual person. It is quite unique, so it makes sense to analyse this. For the purposes of this analysis, I am assuming the individual is middle class with a taxable level of income below ~25 lakhs per annum.

A car is similar to white goods, which gives utility value, convenience, and adds a new dimension to lifestyle. If you did not have a washing machine, you wash your own clothes by hand (time consuming & labour intensive) and/or relied on laundry services (higher recurring expenses). If you did not have a car, you either walked/cycled everywhere (time consuming & labour intensive) and/or relied on auto-rickshaw/taxi/bus/train (higher recurring expense). Both these goods, washing machine and car, add a lot of convenience to your lifestyle.
They have utility value. BUT, a car is different from a washing machine in one very important aspect.
It has a high purchase price relative to income for a middle class person, and has a higher, but reasonably predictable annual expense (fuel, maintenance, insurance). Hence, the loan/no-loan question is a bit more nuanced when compared to other utility goods.

A loan to buy a car makes sense in this one situation.
If you are a younger salaried person, who is making his/her way up the corporate ladder, getting promoted, getting bigger increments, then your salary is increasing at a rate far above the rate of inflation. It makes sense to take a loan for a car as long as the following 3 conditions are met. The EMI burden reduces very quickly in this scenario.

1. The EMI is well within affordability limit. Even before I started searching for a car, I first did an analysis of my personal finances to see how much money per month I can comfortably afford as EMI without affecting any other personal expenses or savings/investments. So for example, if I earned Rs.100, and spent Rs.80 combined on household, medical, savings, etc, and car running expenses would be Rs.10, my EMI budget would be Rs.8, leaving a cushion of Rs.2.
2. Ensure that the outstanding loan principal amount is always less than the book value as per insurance throughout the loan tenure. This would mean that, even if the worst happened and the car was written off, you could always give the insurance pay-out to the bank and be financially secure. This also means that you should put down ~20% down payment - as measured against the ex-showroom value of the car and not on-road price!!
3. Loan tenure is 5 years or less. No exceptions. For an individual buyer, car loan EMI is a burden because it is not being used to finance an asset - remember that the car is a utility lifestyle item. Never extend the burden beyond the horizon of predictability. 5 years is the outer limit.

Personally, I bought 2 new cars, both on loan, and in both the cases the above conditions were met. For the first car, I took 5-year loan and did not pre-pay it (even though I could) simply because I was lazy . In the second case, I again took 5-year loan but paid it off in less than 3 years.
And now that I no longer fit the description of a "younger" salaried person, the next car I buy will not be financed - I will buy a car only if I have the cash in hand for its full on-road price. Having said that, sometimes, car dealers will be happier to make better deals if you take finance from them. In that case, I will follow this advice in the Indian context:

https://www.youtube.com/watch?v=rZaMzqOrLS0&t=396s

[airbus]

I would prefer to go for a full down-payment and bought my first car by making full down-payment. The reason was that car is a depreciating asset and bank deposit interest was lower than loan interest. My current car was taken under company car lease scheme and I opted for this to save tax on EMI as well as fuel and maintenance. If I don't go for company car lease for my next car, I would not opt for a loan.

[Scorpio80]

Voted for "Loan taken for any other reason"

This poll has no right or wrong answer. The situation differs for everyone and they need to understand their financial planning while making the decision.

Why taking Loan was beneficial for me:

I bought a car 3 months ago with almost 85% on loan as it was financially prudent to me and the net effect of taking the loan was getting the car cheaper than what I paid.

I am disciplined investor, and have been splitting my savings evenly between fixed (EPF) and equity for the last few years. Between the two, the average returns I have received is 10%+ without taking any risks.

When buying the car, I didn't not make sense for me to liquidate investments that were giving 10%+ returns to save 7.5% interest for car loan. In effect, I am making money by taking the car loan, which reduces my eventual cost of the car.

Another unplanned advantage I got was that the extra money I pumped into EPF is now out of the 2.5L limit that was introduced this year and will give me tax-free returns until I retire.

[daretodream]

It depends on where are we in our life(age, family) and profession.

I Voted for "Couldn't buy without a loan" as that was the case in 2012 when I got my Fiat Linea Emotion (Diesel Top End) in 2012 for INR 11.37 Lakhs on-road. Back then my family was small, we had much lower salary(vs today).

Back then(I was 31 years old), we had savings of INR 9L to buy the hatchback - Fiat Punto without loan. When we went showroom to book the car, wife saw the Linea and liked it and encouraged me to go for it. So, I had to take loan to bridge the gap and I wrote off that loan within a year.

9 years down the line, I am at a different stage in my life(40 yrs) and have different perspective and priorities. Today, my family is larger now and they find it difficult to tour in Linea (@ 9 years, 81K KMs) and I am looking to get a 7 seater SUV/MUV from my savings (Without any loan)

What has helped is Delayed Gratification - Holding onto Linea for 9 years (and counting), channeling those savings towards investments, promotions and increments at work over the years, and fully supportive of spouse's career aspirations. This has allowed us to buy our next car without loan. We can look to buy it from our savings and without any heartburns.
I am not smart enough to look at opportunity cost (i.e. take loan at 11% and invest in stock market for 18% gain) and even though my investments have been 20%+ over 5+years, I still prefer peace of mind and less hassles here.

[charanreddy]

Depending on the personal wealth situation, people may answer differently. If the car value in question is <20% of your total cash in bank, then pay the full amount and save on $0.02.

Personally I value liquidity over making sure I pay less interest to the bank.

I bought 2 new cars, both on loan. One was for a period of 4 yrs and next for 5 yrs.

For my second car, I could pay full amount but decided against it as I valued money in bank or FD more than some rupees I will be saving in interest.

Private jobs aren't secure and un-anticipated expenses could come up any time. It would be a horrible situation to be in to search for loans / money in such a situation. Liquidity / finance at attractive rates is only available when the banks / other private lenders know you don't need the money at any cost.

Hypothetically speaking, lets assume vehicle loan is at 2 Pts Over the corresponding FD rate. Its a good price to pay for peace of mind. Also in really bad scenario, the bank may repossess the car and the damage stops there.

[Ash_vtec]

Don't take on debt for liabilities.

Unless the opportunity cost gives returns that's large enough to swallow the cost of money, you're better off buying what you can afford outright rather than falling into the debt trap. Zero downpayment schemes may seem attractive but pretty soon you'll be servicing a loan on something worth less than what you owe.

If you absolutely must take a loan for whatever purpose (IT or cash crunch), my personal comfort factor is no longer than 36 months max.

Always remember as passionate as we all are about cars, it's not an investment... it's a liability. And we truly enjoy the cars we can comfortably and completely afford in all its upkeep rather than a dust gathering status symbol silently taking a chunk out of your balance every month, and depreciating so its next owner can enjoy it guilt free.

[PrasannaDhana]

Car loans are stupid IMHO.

There is this shallow craving with most of us, to buy a car that we actually can't afford, so as to impress our friends/relatives/neighbors etc.

For an example, a guy with 8 lakhs cash will not look into cars with OTR prices upto 8 lakhs, but will look into twice that amount, becoming loaded with a debt of 8 lakhs.

If you are rich and don't mind that few lakhs interest and if it does some good stuff with your IT filing, well.

My philosophy is simple - buy what you can afford. If I can't buy the car outright with my own funds, it's too expensive to me.

5 lakhs and you don't get any good new car? Go pre-owned.

But then, there is this sentiment and emotion crap that gets into us when it's time for a car purchase. So to each, his own.

[Mohitkumaar]

Our Jan 2012 A-Star Automatic has 6 years left in its life! Damn the 15 year NCR limitation. It was purchased cash by my mother's savings.

From Jan 2022, I will start an RD of whatever I get as pay hike this year, minimum 5000 Rs, so I have some cash ready to buy a car by the time Jan 2027 rolls around.

And this time I am buying it from Haridwar. I want to retain car for as long as possible.

[astrodex]

Interesting thread and also surprising to see lots of people avoiding loans. I'm noticing a very =stark difference in how car purchases are made in western countries and in India. I'd rarely seen anyone buy a car at full price in USA and didn't expect it to be so commonplace. Instant gratification and all, but then yeah there is a safety net that might be missing for us.

I have always taken a loan (except for my $2000 'student' car) even though I could afford to pay all of them outright. Well, initially the special loan rates given by the dealer etc. was better than or same as FD rates, so it made sense to take the loan and keep the money in the market earning interest. It also served as additional rainy day fund instead of being locked in vehicle.

Now, as an entrepreneur, it does not make sense to go for outright purchase. There is additional costs in registering as a company but then the expenses also get paid via the same and you get depreciation benefits. Additionally, it helps build the CIBIL score of both me and my company.

[Ash_vtec]

Originally Posted by astrodex

Interesting thread and also surprising to see lots of people avoiding loans. I'm noticing a very =stark difference in how car purchases are made in western countries and in India. I'd rarely seen anyone buy a car at full price in USA and didn't expect it to be so commonplace.

Additionally, it helps build the CIBIL score of both me and my company.

Finance rates of developed countries are much lower, i think they are at 2-3% compared to our 7-9%. Further our used car rates are even more insane.

CIBIL is a different benefit for oneself or company and I agree it helps build up a good score. I still stick to 36 months for the same.

That is, of course a benefit only if one successfully clears without a single default or worse repossession.

[Annibaddh]

Voted: Couldn't buy one with a loan. Well I could've if I'd saved up and invested well and push the purchase for a couple of years. So having learnt that lesson, I'm never going to buy another one on a loan. Simple. I'll buy a used car if I need a nicer car, push the purchase, even use car sparingly and make the current one last a bit longer. But not buy another car on a loan.

[Aviatoraval]

My take is to buy on loan. (Purely for my case, Not yet acquired enough wisdom to guide others)

1. Because I cant buy outright, it will take me 5 years to save for segment which I want to buy. It seems I'll always be one cycle behind.

2. Just bought Harrier XZA+ but did not touch my savings and investments. Interest I am paying for my car loan is less than If I keep my money parked in my investments which are cumulatively giving me more returns due to larger add on sum and compounding.

3. My own dept loan is at 7.75 and banks giving at 7.3 but I preferred own because of no hypothecation involved and no charges for pre payments/ foreclosures etc. Better rate as insured loan.

4. For few individuals, loan might be better option due to availability of preferred rates of interest on loans if taken from own organisation (Banking/Finance).

5. It also depends upon ones liabilities or commitments like medicare/children education/mortgages/ongoing loans which in my case is planned and catered for.

6. It also depends on period for which I would like to keep my car. My current one is 12 years. The one I booked is intended for 10 years min. So its like pay up in 5 to 6 and save for another 3 to 4 years. Don't withdraw let it accumulate with bigger principle and more compounding benefits.

7. Being a salaried person cant even take tax benefits as car will not be company asset but of individual.

Dear BHPians, Pls guide me about one issue, Why it says " I may not be able to vote on this poll". Am I barred or something like that.

[PrasannaDhana]

Originally Posted by Aviatoraval

Dear BHPians, Pls guide me about one issue, Why it says " I may not be able to vote on this poll". Am I barred or something like that.

That's because you are one post away from being a BHPian instead of Newbie.

Once you are 25+ posts, you would be able to vote.

[sgmuser]

Originally Posted by AutoConsultant

Liquidity : I felt it is better to have some excess liquid cash at your disposal especially in these uncertain times

Low interest rate : got a loan from HDFC at 7.6%. I felt I could get more returns if I invest the same money in Large cap stocks or mutual funds (which are still liquid in some sense as compared to putting it in buying the car)

Wise decision, as keeping some cash is always a good idea, especially, if we have dependents like parents etc. Also, with the markets down a bit, start a MF via SIP route and pay monthly from the interests or from the principle, you will surely, at the end of the loan tenure would have gained from the grown up funds. You also, saved some good money, because of the discipline it brought in. In one scenario, I kept my FDs just to take care of untoward medical expenses of my parents, but luckily nothing major. Even for some expenses, their policies via their govt. jobs, took care of themselves. We need to learn a lot from our parents. When mother left me, she took care of her medical expenses via insurance (I did not even know that it existed) and had multiple savings. This is the old gen brain. A lot to be learned from them.