Team-BHP - Car Loan against Fixed Deposits

Here is a brief skinny of things (as of Aug/2010):

Most banks will give a loans based on FD without too much paperwork, and shave off the interest rate by about 0.5-1% based on tenure & loan amount.

For eg, HDFC bank can give a loan amount of 2X the times of your FD with approx 0.5-0.75% less interest rate than normal. Their current loan interest rate is 10.25, but they can get it down to 9.75-9.5% if you put an FD of at least half the loan amount.

Tenure of FD is same as tenure of Loan, and your effective loan interest rate is the difference of Loan interest rate (say 9.5%) and deposit interest rate (say 7.5%), which is around 2%, but FD mentioned here is 1/2 the size of the Loan amount. However, since your FD is cumulative and grows, whereas your Loan keeps reducing, so your effective Loan interest is still around 2%.

Here is an example:
Loan of amount 4L for 5 yrs, interest rate 9.5%, EMI 8,400/-, total repayment=504,000/-, interest component=104,000/-
FD of amount 2L for 5 yrs, interest rate 7.5%, cumulative amount at 5 yrs=287,125, interest component=87,125/-
Your effective total loan interest payout = 104,000 - 87,125 = 16,875/-
Your effective total repayment = 416,875/-
Your effective loan interest rate = 1.64%

Note that interest earned on FD is taxable.
For businessmen, interest paid on loan is deductible.

Loan interest rates are supposed to rise in the next month or so, with RBI increasing the base rate (this has not yet been fully passed on to fixed rate loan customers). For this reason, you will not see many offers under 10-10.5% at present.

Sorry to bump up the old thread, but I am doing so with some calculations :)

This funda seemed very tempting to me, keep money in FD in bank, and take loan on it, pay easy EMIs, no hypothecation zhanjat, and besides getting more in hand in the end! As I am planning a car purchase soon, I looked a bit more into it. Is taking a loan on FD is better than breaking it? Let's see:

FD amount: 5L
Rate of interest: 10%
Return after 3 years: 798600

Suppose we take loan on this FD, with 2% more interest.
Loan allowed: 480000
Loan interest: 12.00%
EMI: 15,942.87
Tenure: 36 months

So at the end of 36 months, you will get FD maturity amount - total EMIs paid = 798600 - (15,942.87x36) = 2,24,656.68

If you would break the FD and keep only (5L - 4.8L =) 1.2L in FD for 3 years, you would get 1,59,720 at the end of 3 years. As 2.24L is more than 1.59L, first case is naturally better, right?

Not quite. If you break the FD, you don't have to pay the EMIs. If you just put aside the EMI amount each month under your bed, not even invest it in any account, you will have saved (15,942.87 x 36) = 5,73,943! Add to this the matured 1.2L you invested at the time of buying the car, you would get 5,73,943 + 1,59,720 = 7,33,663! If you invest it at the same interest rate 10%, then the final sum goes up to 8,21,495!

Some may argue that 10% is too high a figure for consistently investing in FDs. True. This period of above 10% interest rate may not last long. But here comes something interesting. In above model, even if you keep interest rate at 0% and then loan at 2%, still breaking FD is profitable.

In case of breaking the FD, you lose the liquidity, but the savings are substantial. Thus for persons having FDs ready, breaking them may be more profitable than loan.

The only case I guess where taking a loan will be profitable, is when your FD is very near its completion, say a few months from now. In that case, if you break now, you may lose 1% of the promised interest rate as penalty.

My 2 cents..

Suppose you open an FD with bank and next day you tell the bank that you need loan againts your FD. And if you don't do any repayment then the calculations will be as follows

Source: Fixed Deposit Interest Income Calculator : Rupee Times

If you have a FD of 5 lakhs for 3 years at 10%(Quaterly compounded) then the capital on maturity becomes Rs 6,73,226.86.

Bank will give you 4.5 lakhs at 2% over and above your FD intrest rate.
So the EMI(source carwale) structure for 4.5 lakhs loan for 3 years at 12% is
Months EMI
12 Rs. 39586/- View Chart
24 Rs. 20973/- View Chart
36 Rs. 14798/- View Chart
48 Rs. 11733/- View Chart
60 Rs. 9911/- View Chart
72 Rs. 8710/- View Chart
84 Rs. 7865/- View Chart

So at the end of 3 years you would pay 14798*36=5,32,728/-

So on your FD maturity you will get 6,73,226.86-5,32,728=1,40,498/-

Is this calculation right???

Quote:

Originally Posted by swapnil.rahate (Post 2446353)

So at the end of 3 years you would pay 14798*36=5,32,728/-

So on your FD maturity you will get 6,73,226.86-5,32,728=1,40,498/-

Is this calculation right???

No man. EMI paid in the 1st month doesnt have the same value as EMI paid in the last month. You need to increment it by (1+i)^3 for yearly interest, or better (1+i/12)^36 for monthly interest, and then add up. Look at it in this way, that you could have invested that EMI each month, and at the end of 3 years, you would have got the interest as per the tenure of each installment.

I am having 5.6 lakhs sitting pretty in SBI savings bank account doing nothing, since last 8/9 months. Now I need 4.5 lakhs to buy an A-Star AT.

There are three ways of doing it.

A. write out a cheque for 4.5 lakhs.

B. go for car loan for 4.5 lakhs

C. Open an FD account for 5 lakhs out of this 5.6 lakhs tomorrow and take a loan for 4.5 lakhs against the FD. SBI manager told me they pay 9.25% on FD upto 10 years and they charge 10% interest on loan against FD, i.e. only 0.75% over what they pay and not 2% as has been reported everywhere above.

So, A, B or C? I am confused. May I get some suggestions please?

Quote:

Originally Posted by pgsagar (Post 2447780)

If my calculations are right then you should definitely go for loan against FD.

Answer to your options-
A. Even if you pay outright cash and invest the remaining in FD you will get much lesser than if you take loan against FD.

B. Car Loans have higher interest rates

Do your calculations and see what suits you the best.

All the Best.:thumbs up

I would like to remind you that you are paying that 2% interest on your own money. Your interest income for bank is taxable. The interest on OD cannot be claimed as a deduction.

However, I am still a fan of Overdrafts over EMI based loans. I plan to use a slightly modified model. I have shares worth about Rs. 30 lakhs. I got an overdraft facility by pledging them to the bank. The value of the over draft fluctuates with the market value of underlying shares. The bank recalculates the overdraft every saturday based on Friday's closing price. Your OD facility equals 50% of the market value of the pledged shares. If there is any shortage, the bank sends you a letter to fund the account or pledge more shares within a week. They also charge a minor penalty which shows up along with interest on the OD statement every month. I plan to buy my next car from this OD.However my car budget is less than 6 lakhs and so I am safe from the vagaries of the stock market. I am not bothered of EMIs. However there is an RBI rule that says that you must pay the interest component atleast once every two months. All my monthly surplus can be drained into this account to keep the balance minimum. I do not intend to sell these shares during my lifetime. I get decent annual dividend from them. This suits me. Once a year I renew the Overdraft account and there is a renewal charge. If I buy a car from here, I just need to write a cheque. No RTO documentation etc.

Would suggest option A, as it makes most sense.

Your savings account earns only 4% interest and that is taxable. FD would yield around 9%, which is taxable. Loan will cost almost 14% to 15%. Why would you want to earn such low rates on your money and pay such high rates on borrowed money. Same goes for loan against FD also.

Quote:

Originally Posted by pgsagar (Post 2447780)

Quote:

Originally Posted by ani_meher (Post 2446613)

The value of the EMI may not be the same, but the EMI remains the same for the whole tenure.