Car Loan against Fixed Deposits

[carboy]

Originally Posted by GTO

Am I missing on something here?

Yes. You are missing the compounding of the difference in installments. i.e. the person who is paying the lower installment is not going to keep the difference in his cupboard every month, he can put it into a recurring deposit and earn interest on it.

Let's assume both person A and B start off with a total of 10 Lakhs in their bank.

A takes a loan of 7 Lakhs and has an EMI of 15220 per month
B takes a loan of 10 Lakhs and has an EMI of 21742 per month.

Assume A and B have an income of 50,000 per month from their job. After spending on everything else except the EMI, they both have 21742 left per month (I am assuming 21742 for simplicity, you can substitute this with any other figure of your choice).

After 5 years, A's FD matures to give him 11 Lakhs, B's matures to give him 15.5 Lakhs.

Every month after paying his 15220 EMI, A puts the balance 6522 into a recurring deposit. At the end of 5 years, this compounds to 5 Lakhs.

So at the end of 5 years, A has 11 Lakhs + 5 Lakhs = 16 lakhs.
B has 15.5 Lakhs.

A has come out ahead by 50000 Rs.

Even better would be if A did not take a loan at all and put the whole 10 lakhs in buying the car. He would be even further ahead.


If Bank gives you money at X% and you give bank money at Y%, and X is greater than Y, you can never ever come ahead (excluding other external factors).

We have also ignored one more thing which will put A even more ahead. You have to pay income tax on the interest on the FD. So you never get 9%, you will get much lesser than that.

[DieselFan]

well said carboy. If a person has an FD he/she is better off using the FD amount to buy a car and create a recurring deposit every month to bring savings back to the previous levels using the EMI which he/she would have otherwise paid the bank.

It doesn't make any sense to buy a car on loan when you already have money upfront to buy the same.

[NetfreakBombay]

Originally Posted by carboy

If Bank gives you money at X% and you give bank money at Y%, and X is greater than Y, you can never ever come ahead (excluding other external factors).

This is not correct. In this case:

1. One series is compounding upwords every quarter (Interest gets added to amount on which further interest is calculated)
2. Seconds series is compounding downwards. Each EMI payment reduces the amount on which further interest would be calculated.

As an example:

1. 10 lakh in FD will become 27 lakh in 10 years @ 10% rate
2. 10 lakh loan for 10 years @ 12% will cost 17.2 lakh ( 7.2 lakh interest)

Calculators:

Loan cost : http://www.practicalmoneyskills.com/...=12&months=120
FD value :
https://www.easycalculation.com/compound-interest.php

Maths behind it (Time value of Money):

http://en.wikipedia.org/wiki/Time_value_of_money

[carboy]

Originally Posted by NetfreakBombay

This is not correct.

Please find the mistake in my calculations above.

Originally Posted by NetfreakBombay

1. 10 lakh in FD will become 27 lakh in 10 years @ 10% rate
2. 10 lakh loan for 10 years @ 12% will cost 17.2 lakh ( 7.2 lakh interest)

**You** are forgetting time value of money here. Specifically, you are forgetting the time value of the EMI you pay every month.


Add that to the calculation.

If you were correct, I would take personal loans from banks @12% and keep putting them in FDs at 10% and live happily ever after.

[GTO]

Originally Posted by NetfreakBombay

1. One series is compounding upwords every quarter (Interest gets added to amount on which further interest is calculated)
2. Seconds series is compounding downwards. Each EMI payment reduces the amount on which further interest would be calculated.

Exactly! You hit the nail on the head.

Other factors that work in favour of loan against fixed deposit:

- What if I already have fixed deposits? Say, something that's 3 years old and has a maturity of 5 years?

- As a businessman, I have 100% probability of claiming the interest paid (on the loan) as an expense. However, the probability of the fixed deposit gains being taxable isn't at 100% probability, as there are certain steps I can take to reduce the tax applicable.

[drsingh]

Originally Posted by GTO

Exactly! You hit the nail on the head.

Other factors that work in favour of loan against fixed deposit:

- What if I already have fixed deposits? Say, something that's 3 years old and has a maturity of 5 years?

- As a businessman, I have 100% probability of claiming the interest paid (on the loan) as an expense. However, the probability of the fixed deposit gains being taxable isn't at 100% probability, as there are certain steps I can take to reduce the tax applicable.

Its simple. If you have capital, invest it elsewhere. Be it bank FD(taxable returns) , gold, equity. Always take a loan if buying a depreciating asset. That too one of the cheapest loans in the country.

[carboy]

Originally Posted by drsingh

Its simple. If you have capital, invest it elsewhere. Be it bank FD(taxable returns) , gold, equity.

Forget buying any car or anything.

If one has capital, one should put it in an FD. Then take a loan against the FD, and put in a new FD.

1. The FD is compounding upwards every quarter.
2. The loan against FD is compounding downwards every quarter.
3. Profit.

One can continue this. i.e again take a loan against the 2nd FD and put it in a 3rd FD and so on.
Very soon we will all be swimming in money and occasionally take breaks to take loans against FDs and putting it into new FDs.

Originally Posted by drsingh

Always take a loan if buying a depreciating asset.

This is the exact opposite of what any personal finance expert says.
The rule is that you never take a loan for a depreciating asset if you can avoid it.

[GTO]

Originally Posted by carboy

The rule is that you never take a loan for a depreciating asset if you can avoid it.

I wouldn't agree with that. See, the fixed deposit example was just one. Now,

1. What if I have the investment acumen to make 15 - 20% annual returns? Therefore, I can take a car loan at 9 - 11%, invest the money on hand wisely and actually make a net profit.

2. To a businessman, additional liquidity usually means additional growth. That's why you'll see big businessmen taking car loans even when they have the liquidity to buy a new car outright.

Net net, I'd rather take a loan and invest the money on hand for greater returns elsewhere.

[pratika]

I took loan against FD from SBI to ease my cash flow. They charge 0.5% more than the FD rate which sounded pretty reasonable (Union Bank charges +2%). They open an OD account in the name of the person who holds the FD and send you a cheque book. You are free to use this money to do whatever you please to. The catch here is they give 90% of the FD principal value, excluding accrued interest. Whereas at Union Bank of India they also consider accrued interest while computing eligible loan amount.

SBI requires one to fill up a form and get INR 200 franking done on it. Thats about it. They keep the FDRs with them till OD account is closed.

To me, this made sense because I intend to prepay the loan in couple of months and close the OD account. If I took a car loan they would charge pre-payment penalty to close the loan early plus their rate of interest is higher at 10.3%.

[airguitar]

Really interesting thread. My own thoughts are as below

1) Go cash if
a) You have cash
b) You have cash/liquid assets over and above what you are spending on the car for immediate needs
c) You don't know how to /you are not interested in making more money with the money you have ( e.g. Vehicle Loan rate is 9.85%, you can earn say 15% with properly planned investments but you have your money plonked into FDs that after taxation earn you around 6% or have left lying in SB that gets you 4%). If this is the case and you have other monies to protect immediate emergency needs, Go cash.
d) Your spendings are commensurate with your earnings, i.e. it's "legal". This should help you understand a bit :
http://www.relakhs.com/how-income-ta...l-transactions

2) Go Loan ( Vehicle ) if
a) The hypothecation tag doesn't bother you
b) You don't mind the paperwork ( which is fairly quick these days )
c) And you dont' have spare cash

3) Go Loan/OD on FDs
a) If you need instant loans ( < 1 day ) and reduced paperwork + mostly it's a bank that you have a relation with already. And you can
avoid processing fee etc.
b) You don't have cash but don't like a loan with hypothecation
c) Economically, I think this doesn't make sense for a car loan., for the same reasons that carboy has stated. IMHO, this option is very
good for personal loans with much higher prevailing rates than vehicle loan rates. E.g. if you are planning on a 4-5 year tenure on a loan
of say 10L, I think it will work out better to go for a vehicle loan ( purely based on rates, taxation on interest earned on FDs )


What's striking though is the number of people that have uninvested cash above and beyond the car spend ( i.e. emergencies covered ), have earned it legally and paid all taxes, but hesitate to do so for unfounded fears of High value transactions ?

[carboy]

Originally Posted by airguitar

3) Go Loan/OD on FDs
a) If you need instant loans ( < 1 day ) and reduced paperwork + mostly it's a bank that you have a relation with already. And you can
avoid processing fee etc.
b) You don't have cash but don't like a loan with hypothecation
c) Economically, I think this doesn't make sense for a car loan., for the same reasons that carboy has stated. IMHO, this option is very
good for personal loans with much higher prevailing rates than vehicle loan rates. E.g. if you are planning on a 4-5 year tenure on a loan
of say 10L, I think it will work out better to go for a vehicle loan ( purely based on rates, taxation on interest earned on FDs )

I don't get it - you say it doesn't make economic sense. So why are you recommending this at all. Why would anyone ever take a loan/OD against FD rather than breaking the FD?

[pratika]

Originally Posted by carboy

Why would anyone ever take a loan/OD against FD rather than breaking the FD?

One reason, at least my case, was cash flow. My FD runs for 10 yrs (2024 maturity) and I expect to pay back the money within 6 months. Opening OD lets my FD run at higher rate of interest than what now prevails.

Of course, if we were in a situation where central bank is expected to increase interest rates then breaking FD would be the clear solution.

[callvvijay]

Got my Xcent last week by going via this route - loan on deposit.

Indian Bank charges +2% on the loan; and since the deposit was made at 7.25%, I could get a loan at 9.25%. Compare this against the car loan offered by Axis Bank @ 9.5% with pre-closure charges (if made before 2 years), part-payment penalty (all through the tenure), hypothecation and what-not. All it took was 15 minutes of time. RTGS-ed the money to the dealer and got a confirmation within the next 15mins.

I'm kinda sure that I would be able to close this loan within 2 years which I would not be able to do without penalties if it had been a usual car-loan.

Cheers!

[adithya.kp]

On question on loan against FD. If i am not wrong, the amount will come to my account and then i will pay the dealer by dd/cheque. My question, is wont it considered outright purchase and hence catch the attention of IT?. ( I heard that anything above 5 lakh will be reported to them). Please note that its a legal money and i have been filing it returns.
Would appreciate if someone could help. I really hate the paperwork involved in car loan.

[Lobogris]

Originally Posted by adithya.kp

On question on loan against FD. If i am not wrong, the amount will come to my account and then i will pay the dealer by dd/cheque. My question, is wont it considered outright purchase and hence catch the attention of IT?. ( I heard that anything above 5 lakh will be reported to them). Please note that its a legal money and i have been filing it returns.
Would appreciate if someone could help. I really hate the paperwork involved in car loan.

If it is legal money then why do you need to worry? You can always show that you got a loan against your fixed deposit if any questions are asked. It is unlikely to lead to any issues unless the car you are buying is valued at several crores. I have purchased 3 cars in India in the past 3 years and I have paid via demand draft for 2 and in cash for the other one. No one has questioned me about it. In fact my relatives advised me to get a small loan to avoid scruitny just like you mentioned but I wasn't worried as the funds were legal.