[fhdowntheline]

How about taking a (loan overdraft after FD'ing the accumulated amount ? You may pay slightly lesser interest and have the flexibility to close your OD as per your cash position. I have done that in the past.

[Scorpio80]

Originally Posted by Mohitkumaar

Can you explain your last sentence though, about your car being cheaper than wat you paid because of loan preferably with numbers in the example.

Here is an explanation.

You have 10 lakhs invested in MFs for a car. You decide to buy a car and have two options

Option 1) You liquidate the MFs and buy a 10-lakh car. You have no money remaining and have the car. You start putting the EMI equivalent amount from Option 2 in a MF (which hypothetically gives you X% annual return)

Option 2) Instead of liquidating the MF, you go for a 10-lakh rupee loan for the car at 7.5%. At the end of year 1, your investments have appreciated by Y% annually, and you have to pay 75K interest.

When difference of returns (Y% - X%) from the above options is more that the loan interest rate (7.5% in example above), you make more / save money. Since long-term equity markets usually tend to go up, this differential is usually positive and in most cases beats the loan interest.

In my case, the difference (Y% - X%) is more than 10%, covering the 7.5% interest and having saving of more than 2.5%, which is additional money that I wouldn’t have if I had gone for option 1. That’s my car becoming theoretically cheaper, because I have increased/saved money elsewhere.


Kindly note that this requires equity markets to appreciate. I made an calculated assumption that for a 5 year period, the difference above will be more than the loan amount and was willing to take the downside if it didn't.

[sunilch]

Originally Posted by Scorpio80

In my case, the difference (Y% - X%) is more than 10%, covering the 7.5% interest and having saving of more than 2.5%, which is additional money that I wouldn’t have if I had gone for option 1. That’s my car becoming theoretically cheaper, because I have increased/saved money elsewhere.

Add to that --> The 7.5% on loan is not exactly 7.% * Principal Amount * No of years of loan. It is reducing over time. So net-net, your (X-Y)% difference will be more than what you have presented for now (simplified).

Originally Posted by Mohitkumaar

Hmm,i will consider MF SIP.

Can you explain your last sentence though, about your car being cheaper than wat you paid becuase of loan preferably with numbers in the example.

You could do that with your RD too but for that you may have to save a larger amount. So if you save 2X (X is your cost of the car) and then take a loan or OD against that FD that you have of 2X, you will have more savings in the end compared to the case when you liquidate your savings.

[Scorpio80]

Originally Posted by sunilch

Add to that --> The 7.5% on loan is not exactly 7.% * Principal Amount * No of years of loan. It is reducing over time. So net-net, your (X-Y)% difference will be more than what you have presented for now (simplified).

Yes, totally agree on that. Didn't want to over complicate by bringing that aspect as well into picture. The logic I gave above is as it is difficult to explain and lot of people in my circle think that that I took a wrong decision by taking loan.

[Mohitkumaar]

Originally Posted by fhdowntheline

How about taking a (loan overdraft after FD'ing the accumulated amount ? You may pay slightly lesser interest and have the flexibility to close your OD as per your cash position. I have done that in the past.

See in this case I still end up paying net interest na! No way can FD even out the car loan interest

So my cost of capital is still going out of my pocket! Will analyse MF option and get back here..

[aniketi]

My thumb rules while buying car -

1 OTR Car price should be less than 50% of your annual gross income, 30-35% or less is ideal. E.g. Gross income 20 Lakhs, one should buy car worth 6-8 Lakhs.

2 Car EMI + Fuel + Maintenance cost should not go beyond 15% of your in hand average income. E.g. In hand income 1 Lakh, your expense should not be more than 15 thousand for EMI + Fuel + Maintenance.

These are my rules, not applicable for all. It all depends on how is your financial background, how much other liabilities you have and how much other EMI's you have.

Happy purchasing !!

[SidR]

Very interesting thread. Thank you for putting this together.

I have been contemplating buying a german car (Audi A4/Q3) for last 3-4 years, however, I could never convince myself for the same. Now, I assume an A4 or upcoming Q3 would cost around 40lacs. Does it make sense to go with the heart and buy it in early 2023 when our family gross income would be around 65lacs (pre tax)? We will do 10-15lacs down payment. We are investing heavily in equities this year on dips as next year EMI (50k or so) would reduce the investment into equities. We plan to retain our Baleno delta petrol (6 years) for city runs. We expect our new car to do 600-700kms per month, 70% highway.

Any inputs are welcome.

[kosjam]

I recently approached my bank (IDFC) for a 2 wheeler loan. They told me that the ROI for the loan amount would be approximately 9%. On asking her how is this class leading and a good option, when the FDs are giving only 5% currently. What she said was interesting.

Rate of Interest on FDs and loans is not comparable. She converted the loan amount ROI into FD equivalent rates, and then it started making sense.

For example, a 10 lakh loan on a 9.99% floating rate of interest is only slightly higher than a 10 lakh FD with 5.5% for 5 years.

In other words, its better to take a loan and use the money you would have otherwise put for purchase of the 2 wheeler in MFs which would give a return of more than the FD.

[Iyencar]

The best thumb rule is to keep your thumb in your pant pocket and not use it to cut a cheque or spend cash on a depreciating "asset" like a car.

[naru80]

Originally Posted by SidR

Very interesting thread. Thank you for putting this together.

I have been contemplating buying a german car (Audi A4/Q3) for last 3-4 years, however, I could never convince myself for the same. Now, I assume an A4 or upcoming Q3 would cost around 40lacs. Does it make sense to go with the heart and buy it in early 2023 when our family gross income would be around 65lacs (pre tax)? We will do 10-15lacs down payment. We are investing heavily in equities this year on dips as next year EMI (50k or so) would reduce the investment into equities. We plan to retain our Baleno delta petrol (6 years) for city runs. We expect our new car to do 600-700kms per month, 70% highway.

Any inputs are welcome.

Your query requires more data for any useful answer:

Your age, Debts (if any), Income expectations for next 5 years, Upcoming major expenses, Money goals, etc.

Buying a car is just one expense in life journey and IMHO should not be seen in isolation. Best to use one of the online retirement calculators and input your data (including 40 lakh for a car in 2023) and see if the numbers add up.

[SidR]

Originally Posted by naru80

Your query requires more data for any useful answer:

Your age, Debts (if any), Income expectations for next 5 years, Upcoming major expenses, Money goals, etc.

I understand, here you go. Age approaching 34. Married but No child and no plans to have any. No debts. Income grows at more than 12% per year. No upcoming major expenses. After all expenses, including car emi and other expenses, we might still be able to invest more than 50% of our income. We will not sell this car for next 7-8 years at least.

[graaja]

Originally Posted by SidR

After all expenses, including car emi and other expenses, we might still be able to invest more than 50% of our income. We will not sell this car for next 7-8 years at least.

For this condition I would go ahead and get the Audi without any guilt whatsoever

[Latheesh]

Originally Posted by SidR

I understand, here you go. Age approaching 34. Married but No child and no plans to have any. No debts.

No debt is nice, how about net worth? Your calculations depends on some assumptions (future salary expectations, savings rate, no planned big expenses etc.) and net worth is more important in your case. If car cost is not more than 10-20% of your net worth, you are good. Otherwise it is bit risky.

I never follow these when I buy my car though

[sunilch]

Originally Posted by Latheesh

If car cost is not more than 10-20% of your net worth, you are good. Otherwise it is bit risky.

I never follow these when I buy my car though

You will never be able to buy the right (desired) car in this case then

[SidR]

Originally Posted by Latheesh

No debt is nice, how about net worth?

I never follow these when I buy my car though

Net worth to car price ratio would work fine. I can pay cash but I think loan would be better at current rates (might go for 25lac loan). Also, it's Heart vs Mind battle, Heart says YOLO, this is the age to enjoy the four rings. Do those road trips and enjoy to the fullest while we can. Mind says you could be financially independent in 3 years if you don't buy the car now. On top of that, wife says I haven't asked you for any jewellery whatsoever in last 4 years, go get me those 4 rings and I won't ask for any jewellery for another 4 years Frankly, I am tempted.