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-   -   Car Loan against Fixed Deposits (https://www.team-bhp.com/forum/indian-car-loans-insurance/51179-car-loan-against-fixed-deposits-5.html)

This is the smartest thing that I have heard so far!

Especially when, in case of salaried individuals, the interest received is taxable and the interest paid is not tax deductible!

Well said!

For salaried individuals, the best option is detailed here:

http://www.team-bhp.com/forum/indian...-car-loan.html

You keep the liquidity for the term of the loan, do not pay any interest (so no more y>x scenario as described above by carboy), plus no tax liability either. It simply can't get better than this! All thanks to our friend @keyur who shared this option with us!!

"You keep liquidity" but the "do not pay interest" happens only if you do not utilize the Overdraft facility. The problem with having liquidity on tap is that most people will end up using it. If you use the OD facility, then you will obviously pay interest. If you use it fully, for the entire tenure, you will end up paying more interest, since the interest rate on an OD account is higher than the interest rate on a car loan.

Also, you will not have full liquidity "for the tenure of the loan". The OD limit will be reduced monthly. Any bank will not get into a situation where the OD limit is higher than the value of the car.

This may be the best option for those who do not need the loan but want to have liquidity available to them. It may be more suitable for businessmen instead of salaried individuals.

So, you really cannot say that this is the best option for salaried individuals.

Then in that case credit cards, loans and advances etc should be out of bounds as well. If one can not practice self discipline when it comes to financial matters, nothing will work out irrespective of one being a salaried person or a businessman. I do not think this argument holds here coz if someone wants to be irresponsible, no one can stop him/her.

Well it is your money. The OD balance can go higher if you keep depositing money into the OD account over and above the O/S principal (even the EMI being paid every month will keep adding to the OD balance - at least the principal component of it). But why would someone do that since this excess money won't earn any interest? The bank will be more than happy to let this money stay idle in the OD account since they do not pay any interest on it.

Even in cases where a salaried person takes an advance against existing FD's, the money is available in the first place (just that it is tied up for a certain tenure). It is irrelevant whether one is salaried or businessman. The point here is that why have a bank pay you say 10% (taxable) for a deposit when you are paying an additional 2% or whatever back to the bank, when all this while the bank is enjoying the safety net of your existing deposit as additional collateral.

When you use the OD option, your deposit amount effectively is earning an interest equal to your loan rate (a rupee saved is a rupee earned my friend!). And this is not taxable, so even the salaried employee gets to enjoy the interest savings without worrying about the taxman and safe in the knowledge that should he need the money for an emergency, he can simply write a cheque or do an NEFT/RTGS from the OD account in a flash. It can not get better than this. Unfortunately, the psychological comfort of keeping your FD intact while borrowing money at a higher rate, comes in the way of prudent financial planning and resultant interest savings.

You are absolutely right on all counts except that this point holds here because it is a comparison between two types of car loans: One being a regular loan and the other being an OD facility against the car.

The point I am making is as I have said earlier "If you use it fully, for the entire tenure, you will end up paying more interest, since the interest rate on an OD account is higher than the interest rate on a car loan."

So the OD facility is only for people who do not need the loan or want to prepay it. It is not for people who will repay over its regular tenure.


There is a difference between balance and limit in an OD account. It is not money I was talking about. I was talking about the OD limit. The OD limit will reduce each month.

Here is an example: If you have a OD facility with a limit of 600,000 for 60 months, the limit will keep reducing by 10,000 each month. Your OD limit will not be 600,000 for all 60 months. After 24 months, your limit will 360,000 and so on and so forth till it become zero at the end of the tenure.

So as I said earlier, you will not have full liquidity "for the tenure of the loan".



Once again, as I have already said "This may be the best option for those who do not need the loan but want to have liquidity available to them."


If planned well, in certain cases, foregoing some savings in interest to protect one's Capital may not be so unfortunate after all.

In financial matters, at times, it is wise not to be very smart.


Thank you so much for your advice but I have to say this. I do not know about you, but I am a practicing Chartered Accountant. I also have a degree of MBA in Finance. I am in the field of finance since 1983.


What I have stated is just my opinion. I am not asking you to accept it.

Cheers!

Guys ,
I am having a FD of Rs.10 lac in the bank at 8.50%p.a for 5 years. I am planning to buy a USED car for say around Rs7.5 lacs. I am not willing to break down and utilise the entire FD amt. Going for used car loans are attracting higher rate of interest and also involves Valuation paper work etc. Kindly suggest me any of the following :
1. Go for Loan against FD
2. Used Car Loan
3. Outright payment by withdrawing (if i have no other option)

Among the first two points , which is more preferable and advantage for us. ?

You go for option 2. Here's why. It's a no brainer.

1. Savings are very hard to come by. Plus FD's should be used as collateral for better more important things for which you wouldn't get a loan without collateral. For example to start a business, to get a student loan for your child, loan to purchase land for a house. These loans will not be available without collateral.

2. The difference in interest rates for new cars and second hand car loans should be about 3-3.5%. If you take a loan of 6 lacs for this car for 5 years, the difference in a new car loan instalment and old car loan instalment will be Rs. 1028. That's immaterial !

So in order to save approx Rs. 1000 per month, you're putting your life savings on the line. (Dramatic!) ;)

Why not?

What's the interest rate, downpayment and EMI?

What's the interest rate, downpayment and EMI?
What's the interest rate, downpayment and EMI?


Yes and it will be even harder if financially bad decisions are made.

Please do suggest a better alternative to these financially bad decisions.

Description of Loan against FD
- The bank takes your money and pays you x% interest on it.
- Then they lend it back to you and you pay y% interest on it.
and y > x

This should be more than sufficient for anyone thinking about loan against FD.
But if more points are needed.

- x is taxable.
- y is not tax dede

Also, there is another thread where this has been discussed to death -
http://www.team-bhp.com/forum/indian...-car-loan.html

Hmmm. So first of all I don't understand. Are you saying a person should take a loan against FD or not ? The above option makes me think its not a great idea to take a loan against FD which is exactly what I suggested in the first place ! :confused

Anyway. If I understand correctly
Option 1. Taking loan against FD : you gave us the schpeal on that.
in a situation where you are unable to pay for your car, your life savings (FD) are forfeited by the bank as that's the mortgage for the car loan. They charge a penalty for breaking the FD before tenure to pay back the loan.
In case you are in need of money urgently, you cannot break your FD as you've pledged it for your car loan. So you've basically not used your cash to pay for the car but you still can't use your own money for any other purpose as well. Lol. That's just dumb!

Option 2. (MY SUGGESTION) Taking an independent car loan and not link it to your FD. everything remains same. You earn the same interest on your FD. if you run a private business and buy the car in the name of the business, interest paid on this loan is tax deductible. In case of a salaried person, you pay probably Rs. 1000 per month extra over the interest rate of the FD loan but in case you're unable to pay back the loan, your car gets taken away, nothing happens to your FD. And! You are always free to use your FD money in case of any emergencies/need.

As I said. It's a no brainer. Please do correct me if I'm wrong.

Loans against FD will work fine for a person who is cash rich (Multiple FDs) and not enough of pre-qualification like 3 years IT statement, salary statement for some months from a reputed company etc.

This would be ideal for a returning NRI isn't it ?.

If you have the cash (in the way of an FD) - breaking the FD & paying cash for the car is financially smart way most of the times - it's preferable to both used car loans and loan against FD.

No - ideal would be to not take a loan when you don't require it. When you have an FD which can be broken with a loss less than the differential rate you are paying for a loan, then you don't require a loan.

This where I completely disagree. It is a matter of pure opinion I guess.

If I have a large chunk saved somewhere, I would save it for a rainy-day, for example a medical emergency for which no loans will ever be Available. As I said, this could be used for student loan mortgage for children, for buying a house etc. why mortgage or worse break it to buy something that'll depreciate every day.

I'd instead take a used car loan and structure the instalments in such a way that I would never need to dip into my savings.

Because if I break my FD, it'll take me years to build up a sizeable savings chunk of 7.5 lacs. And by the time I do end up saving 7.5 lacs (say 3-4 years), the value of that 7.5 lacs would have reduced considerably than what it is today.

Actually, smart money says "never take a loan on something which depreciates".

If you are worried about medical emergencies, get medical insurance.

Also if break the FD instead of taking a loan of 7.5 lakhs for 3 years at 12%, you are saving a monthly EMI of 25000. The Monthly EMI if put into a Recurring deposit at 9% for 3 years will be worth 10.3 Lakhs at the end of 3 years.