Another one of those typical car finance conundrum posts

[tp243]

I, M26, am planning to get a new car (~15L) for my family of myself and my mother. I have ample savings and emergency fund and can easily pay cash down and get this car. I have never taken any EMIs/loans whatsoever. This will be our first new car and a big step up from a 10 year old 2nd hand Swift.

Now there are 2 options:

• Pay full cash - get the car. This enables me to invest the otherwise EMI of 23k p.m. in an SIP @ 9% and probably have around 17.5L at the end of 5 years. Net cash flow = (17.5L - 15L = +2.5L). Also, debt free, lesser paperwork.
• Pay 3.5L DP, get 11.5L car loan ---> The 11.5L that I did not pay from my pocket can be invested @ 9% to get ~17.5L at the end of 5 years. But I would have paid ~14L as EMIs over 5 years + 3.5L DP. So, Net cash flow = (17.5L - 17.5L = 0)

I have conservatively assumed 9% returns. Also, I have a business and I can get depreciation tax benefits in either case.

I am leaning towards the first because no debt!! and also eventually +2.5L cash flow. Have not factored in inflation and all, but this is a rough calculation. Have I miscalculated something? Please let me know!

What would you do in this situation?

 

[tryzub1318]

@tp243 I have a thumb rule: use debt/loan to buy assets whose value can appreciate over time.

In case of car, you have to note that its price decreases over time. You haven’t factored this point in your calculation.

Also, since you have already done the math and math favors no debt, go ahead with option 1.

 

[charlie]

@tryzub1318 Car is not a depreciating asset in Bangalore if you live in Bangalore

 

[texasn]

@charlie It depreciates lesser compared with other cities. But sure it is a depreciating asset

 

[zashmaster]

@tp243 There is not much need to overthink this. You can do a quick comparison of the interest rate, and the assumed post-tax return. Since car loans have higher interest rates, say compared to home loans, in most cases it would be against taking a loan.

 

[tp243]

@zashmaster If returns post 2021 are to go by, I stand to gain profusely by getting a loan, lol. My portfolio has a 3 year CAGR of 21%. Hence the confusion. Is it worth the risk?

 

[todd223]

@tp243 If I were you, I'd go for the loan.

I've faced a similar conundrum in the past (can afford to give cash down but can also take loan) and I've chosen to go for the loan.

The logic of avoiding debt is usually good advice for most people but IF you happen to be a disciplined investor who really thinks about how to invest his/her money and makes conscious, thoughtful choices then beating the loan interest rate of 9% is relatively easy and hence financially speaking it's a better decision.

Disclaimer: this advice is strictly for those people who are very disciplined about investing. I don't leave anything beyond 1 month expenses in my savings account, even my emergency funds is invested in a liquid fund and I'm very aggressive about my SIPs, hence my hurdle rate for equity (opportunity cost) is in the 12-15% range or even higher.

For almost everyone in general, avoiding a car loan is better.

 

[zashmaster]

@tp243 In the post, you had assumed a 9% return - that is a better estimate. You can make it a bit higher too. Still the no-loan approach would work out better. In the case of the loan, the interest outgo is definite. In investments, the returns are only expectations... not definite.

 

[joseph_]

@zashmaster Incase this was a home loan. Would it have made more sense to take the loan instead of paying the amount up front?

 

[zashmaster]

@joseph_ The tax deduction for residential home loans makes the comparison different. Of course there is a limit of 2 lac, but it can be for each co-borrower. If the entire interest is deductible, then the effective rate for a 9% loan would be much lower.

 

[lyanveness]

@tp243 Don’t doubt. No debt is the way to go.

 

[sally1b2b]

@tp243 There are multiple considerations:
1) Loan interest rate v/s rate of returns on investment - This has been covered in most of the responses so will not cover it again.
2) Liquidity availability - If you buy the car in cash, your 15lakh will no longer be with you, for alternative use like an emergency.

So take both of the above into consideration before taking a decision.

I was in same boat a while ago and I did DownPayment of abt 30% and took 70% loan. Rest of the money i had invested in index fund and have given me much more returns than the loan interest rate. However that is looking at it in hindsight.

 

[brione]

@tp243 If you are salaried and high tax bracket, makes sense to consider company’s car lease program because EMI goes from pre-tax income.

For everything else, pay full cash, negotiate hard.

 

[giangnt]

@tp243 You aren't considering time value if money.

In your first case it's 17.5L after 5 years vs 15 L now. That 17.5 value would be lower in current time.

In your second case, it's 15L current time vs 15L in 5 years time.
In either case, loan seems better option from time value provided you are able to hit the conservative return rates

 

[resjudicata]

@tp243 Why not take the middle ground? Pay a higher DP and take a shorter loan tenure of 3 years.

The job market is especially bad right now. Instead of blocking your entire savings, save some money for troubling times ahead.

 

[believerwithquestions]

@resjudicata He's not into Job. He has his own busines

 

[resjudicata]

@believerwithquestions So the job market and businesses are inversely related?

 

[mrdean36]

@tp243 If your savings are more than 1cr, dont bother, else take the loan. After 5 years you would have 3cr, this 3L wont make a dent.

 

[resjudicata]

@tp243 No debt

 

[wilbanks]

@tp243 I was in the same situation as you two months ago. Here is what I did

Bought a Skoda Kushaq for rs. 16 lakh on road price. Paid rs. 10 lakh as down payment. Balance 6 lakh has been converted into a 4 year EMI I.e. rs. 15000 per month. In effect, I will be paying only rs. 120,000 extra as interest over a 4 year period, which doesn't hurt the pocket.

Hope it helps.