[rx100]

Originally Posted by 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.

Any purchase above 10L would attract a TCS, so obviously they added it for income tax scrutiny irrespective of loan or outright purchase. And some big ticket purchases above 50L may attract further review to verify the income sources.

[Mystic]

My personal thoughts as a guy from old school.

1. In USA, I have seen many recessions over many decades and never owned a credit card. During various recession cycles, I had personally seen many people just left their BMWs in the parking lot of Newark airport and left to India and never to return. All these cars were eventually taken over by the Banks which gave loans.In USA, one can even put the home keys in an envelope and post it to the Bank and leave the country. The Bank will take over and no questions asked.

2. I buy all my cars with cash from automobile showrooms and also buying Villas with cash. No issues with IT as the checks are from NRE accounts .When I went for registration of my home, the registrar asked me 15 years back about my PAN number etc. to be mentioned on sale deed. I said I don’t have PAN and he recommended me to put in my Passport number with California address in the sale deed ( it seems that there is a directive from Govt to cooperate with NRIs without bothering them with all hinderances as they bring forex to India).

3. After having talked to my colleagues in India , I was surprised that most of the senior employees who can afford to buy in cash don’t buy with cash as my company gives benefits of HLIS (housing loan interest subsidy) and Car Lease facilities.

[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.

Scenario: I am buying a car and have the cash to pay upfront. Let us take the amount in discussion as 10 lacs, period as 5 years, Loan interest rate at 9% and FD interest rate at 6.9%.

I'll let the pictures do the talking. It is very clear that after 5 years, even the simplest investment instrument with modest returns, i.e. the FD beats the Loan hands down. A difference of 2.62 lacs in interest and even if we tax the interest at 30%, the gain stands at a handsome 1.83 lacs.

I hope I am not missing something big here.

[avira_tk]

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.

Scenario: I am buying a car and have the cash to pay upfront. Let us take the amount in discussion as 10 lacs, period as 5 years, Loan interest rate at 9% and FD interest rate at 6.9%.

I'll let the pictures do the talking. It is very clear that after 5 years, even the simplest investment instrument with modest returns, i.e. the FD beats the Loan hands down. A difference of 2.62 lacs in interest and even if we tax the interest at 30%, the gain stands at a handsome 1.83 lacs.

I hope I am not missing something big here.

You're missing a lot with this calculation, at 2% of asset value a month, I have private transport, your taxi costs will be twice as much and half as reliable if you're lucky.

FD doesn't compound the way the calculator shows, every time interest is credited, TDS is deducted at 10%, you're liable for the remaining tax. This is to be paid in advance, otherwise there's a fine/interest on that also. The total amount you receive will not be anything like 40% over the principal, that last large interest payout has higher tax liability.

Let me explain with a real example, the value of your 10 lakhs as on September 15, 2018 will be 13.46 lakhs, today, 5 years later with official inflation, so your return is roughly 4%, with compromised liquidity. The car on the other hand is good for another 5 years, worth at least 5 lakhs, with only fuel, maintenance and insurance, nothing like 20k a month. I managed to run a Fiat for ten years averaging 15k a year, newer cars will easily last a decade without a sweat. The car prices meanwhile have doubled and most cars aren't desirable as cost cutting across the board has made it's presence felt. Used car prices are through the roof and taxis are fewer, dirtier and unreliable as the early perks have been done away with.

The real test is when you need transport outside regular hours and in an emergency, nothing beats a your own car in that regard. A car is not an asset, it's a tool for transport, saving up and buying it is awesome but don't forget time is the scarcer commodity in the calculation.

Here's the link I used for the inflation calculation.

https://fxtop.com/en/inflation-calcu...DICE=INCPI1958

[Rodie09]

Originally Posted by avira_tk

You're missing a lot with this calculation, at 2% of asset value a month, I have private transport, your taxi costs will be twice as much and half as reliable if you're lucky.

FD doesn't compound the way the calculator shows, every time interest is credited, TDS is deducted at 10%, you're liable for the remaining tax. This is to be paid in advance, otherwise there's a fine/interest on that also. The total amount you receive will not be anything like 40% over the principal, that last large interest payout has higher tax liability.

Let me explain with a real example, the value of your 10 lakhs as on September 15, 2018 will be 13.46 lakhs, today, 5 years later with official inflation, so your return is roughly 4%, with compromised liquidity. The car on the other hand is good for another 5 years, worth at least 5 lakhs, with only fuel, maintenance and insurance, nothing like 20k a month. I managed to run a Fiat for ten years averaging 15k a year, newer cars will easily last a decade without a sweat. The car prices meanwhile have doubled and most cars aren't desirable as cost cutting across the board has made it's presence felt. Used car prices are through the roof and taxis are fewer, dirtier and unreliable as the early perks have been done away with.

The real test is when you need transport outside regular hours and in an emergency, nothing beats a your own car in that regard. A car is not an asset, it's a tool for transport, saving up and buying it is awesome but don't forget time is the scarcer commodity in the calculation.

Here's the link I used for the inflation calculation.

https://fxtop.com/en/inflation-calcu...DICE=INCPI1958

Hey buddy, I am a bit lost here honestly.

While I take your argument around the FD calculation and TDS and will check more in detail on that, but this thread and my post was never about owning a car vs renting cabs. Nowhere have I talked about a 'taxi' in my post. Did you just tag a wrong post or am I missing the point here?

This is purely about buying car with cash upfront vs taking a loan.


EDIT - My calculations in earlier post were off significantly, by a lac ,mathematical error there but method is correct.

Even if I take into consideration 30% tax deduction at end of every year rather than at the end, interest earned is more than interest paid on loan , although very slim and not as in my previous post.

[alpha1]

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.


I hope I am not missing something big here.

Actually, yes you are.
You are comparing two different things:
- in FD calculation, the 14 lakhs amount is the FUTURE VALUE. Which is calculated based on PRESENT VALUE, INTEREST RATE and TERM
- in EMI calculation, the 12 lakhs amount is NOT FUTURE VALUE; you have simply multiplied EMI VALUE with the TERM. If you wish to calculate the future value, then you need to accommodate the time factor also for each of the EMIs!
(In other words Future value of 20K EMI in the first year cannot be same as future value of 20K EMI in the fifth year)

[Rodie09]

Originally Posted by alpha1

Actually, yes you are.
You are comparing two different things:
- in FD calculation, the 14 lakhs amount is the FUTURE VALUE. Which is calculated based on PRESENT VALUE, INTEREST RATE and TERM
- in EMI calculation, the 12 lakhs amount is NOT FUTURE VALUE; you have simply multiplied EMI VALUE with the TERM. If you wish to calculate the future value, then you need to accommodate the time factor also for each of the EMIs!
(In other words Future value of 20K EMI in the first year cannot be same as future value of 20K EMI in the fifth year)

Yes, perhaps I have limited understanding of money matters/finance/economics, whatever it takes to understand this. And I have not understood your point. Perhaps some illustration can help.

And I am not sure what you mean by comparing two different things - as in Apple vs Orange?

The question was simple - with 10 lacs in hand to pay upfront, does it make sense to pay or to take loan and invest money elsewhere - FD used for illustration.

And I think this is a very common, legit question that many must have faced and many are facing.

What is your verdict then?

[avira_tk]

Originally Posted by Rodie09

Hey buddy, I am a bit lost here honestly.

While I take your argument around the FD calculation and TDS and will check more in detail on that, but this thread and my post was never about owning a car vs renting cabs. Nowhere have I talked about a 'taxi' in my post. Did you just tag a wrong post or am I missing the point here?

loan , although very slim and not as in my previous post.

I'm just saying that taking a loan when you're offered it cheaper is better than paying cash upfront, unless it's a used car. Ready cash simply compromises your liquidity, this doesn't apply to those with a steady income and income generating assets. I'm taking about those with salaries and somewhat stable cash flow, putting accumulated liquidity from salary into a car is stupid.

FD is a good reserve for an emergency or life event, I'm not against it.

[antz.bin]

From where I am looking,
Rodie09
avira_tk
alpha1

All of you are implying the same thing.

That it is cheaper to get a loan than pay the entire amount upfront.

You are doing that in different ways.

Rodie09 considered the basic question. If you have the money, the cash to buy outright, is it better to take a loan instead?

avira_tk took a stab at it differently. He considered that we do not have the full cash, maybe we have it invested and then want to cover the loan with the cashflow instead. That's what people with jobs are probably doing. Still the loan comes out ahead.

alpha1 considers inflation in his assessment that 20k emi paid today is more expensive than the 20k emi paid in 5 years. Still all the EMIs put together are eventually cheaper than paying 10 lakh today. Because, Inflation!

Did I get it wrong?

[alpha1]

Originally Posted by Rodie09

The question was simple - with 10 lacs in hand to pay upfront, does it make sense to pay or to take loan and invest money elsewhere - FD used for illustration.

And I think this is a very common, legit question that many must have faced and many are facing.

What is your verdict then?

Just my mere observation of the interest rates 6.9% vs 9% should tell what is more expensive.
Loan is more expensive UNLESS you are able to find a secure way of earning >9% rate of return on your invested amount (say risky debt fund or stock market).

If the thread/forum wants we can walk over the concepts of time value of money and how to calculate present value, future value etc. It is going to be long though.

Originally Posted by antz.bin

From where I am looking,
Rodie09
avira_tk
alpha1

All of you are implying the same thing.

That it is cheaper to get a loan than pay the entire amount upfront.


Did I get it wrong?

Yes it was wrong. I am not implying the same thing.
Taking loan is more expensive than buying upfront.

[Rodie09]

Originally Posted by alpha1

Just my mere observation of the interest rates 6.9% vs 9% should tell what is more expensive.
Loan is more expensive UNLESS you are able to find a secure way of earning >9% rate of return on your invested amount (say risky debt fund or stock market).

If the thread/forum wants we can walk over the concepts of time value of money and how to calculate present value, future value etc. It is going to be long though.


Yes it was wrong. I am not implying the same thing.
Taking loan is more expensive than buying upfront.

Well, its quite strange that while you have considered complex things such as the 'now' and 'future' aspects for the earlier comparison, you seem to have missed out a very simple thing in your direct comparison of interest rates.

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.

[Gansan]

Originally Posted by Rodie09

What is your verdict then?

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.

[anandhsub]

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 paying 20K EMI every month.

While the FD interest of 4 lakhs you receive at the end of 5 years.

Banking is a profitable business, not a charity. By taking a loan and then keeping an FD you are increasing their profits which only comes out of your own income.

[Rodie09]

Originally Posted by anandhsub

You are paying 20K EMI every month.

While the FD interest of 4 lakhs you receive at the end of 5 years.

Banking is a profitable business, not a charity. By taking a loan and then keeping an FD you are increasing their profits which only comes out of your own income.

And why would they do charity? You have taken a nice swanky car in return. Haven't you? You have completely discounted that and making it appear that only the borrower is having an unfair deal.
What about the bank giving you money upfront and not after 5 years? Hope you get the drift.

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

[rx100]

Originally Posted by Rodie09

I hope I am not missing something big here.

When you look it with the calculators, it appears that loan is more profitable and everything looks simple. But that is not the case when you look into EMI(Equated Monthly Installments) payments in detail.

You putting 10L in FD and getting a return of total 14.07L back after 5 years. Let’s keep it simple and forget about all taxes now.

Now think about loan of 10L, here you are paying back monthly 20758 for a period of 60 months. In paper, it appears as your total outflow is only 12.45L. But the value of your emi#1 of 20758 is not same as 20758 in emi# 60 when you consider the time value of money and opportunity cost.

Now let’s check your EMI, on first month you paid 20758, so on for next 59 months. Instead of that if you start an RD @6%, your total investment value would be 14.5L. Again this is without any taxes considerations and interest @ 6% vs 6.9% in FDs case and also compounding annually instead of quarterly. And you can see if you bought the car with cash instead of loan, you would be in profit.

A loan would be profitable only when you can make returns greater than loan interest rate( here >9%). Anything else is a loss in financial terms.