Argument for taking loan for purchasing instead of using available cash(If total amount is available in cash)

[boughtataprice1]

@claudiaspollen I think if you have cash..pay and get the car. As:
1. Cagr percentage from investment is not guaranteed.
2. Tax percentage staying at the same levels is not guaranteed.
3. EMIs are always guaranteed
Moreover there is paperwork and minor costs for both loan and later hypothecation removal.

 

[veronique]

@claudiaspollen You have not considered the emi amount which needs withdrawn from FD every month

 

[faith33]

@claudiaspollen You are considering CAGR but what’s the duration ??!! Loan tenure is let say 3 years you can now way break even with any FD or for that matter fixed income rate instrument.

 

[stephen68]

@claudiaspollen You must be a homo economicus to fully behave like this. Homo economicus is one who will wring his grandmother's neck if the effort and time spent is worth the reward (not getting caught is part of the reward). But people dont behave like this.

So net net, this argument completely ignores the behavioral economics aspect of human decision making. The comfort of not having a loan / liability and the peaceful sleep you get is a reward for which there is no measurable economic value.

So no, your argument holds no water.

NB: This is applicable at a personal level. If you are the CEO of an organization and have take a call on using your free cash or taking cheap debt then probably you would behave differently.

 

[x_miar_x]

@stephen68 You don't even need to bring behavioral economics into the picture. The arithmetic does not add up. You cannot arbitrage/profit from a loan by investing at a rate lower than your borrowing cost. It just does not add up. The guy is presuming that he does not use the 1 lac capital to pay the loan.

 

[stephen68]

@x_miar_x

You cannot arbitrage/profit from a loan by investing at a rate lower than your borrowing cost.

OMG! I missed that I did not even bother seeing the table ... Yes, it makes zero sense. If this were possible, then everyone would simply borrow at 8% and invest with a cagr at 5.36% and still make a "profit". Which of course, makes no sense.