claudiaspollen
New member
Disclailmer: This is not financial advice. Iam not a financial advisor. Do your own research
If you have cash to purchase say a car , it is better to purchase it on a loan and invest the amount suitably because the CAGR return needed to breakeven with interest cost is way lower than the bank interest rate. Here's a calculation demonstrating the same:
+
A
B
C
D
E
F
1
cost of purchase
loan interest rate
total interest expense(7 year tenure)
cagr return to break even(at 30% tax )
cagr return to break even(at 10% tax )
2
100000
8
30,924
5.36
4.3
3
100000
9
35,148
5.98
4.82
4
100000
10
39,450
6.59
5.33
5
100000
11
43,828
7.19
5.83
[sup]Table[/sup] [sup]formatting[/sup] [sup]brought[/sup] [sup]to[/sup] [sup]you[/sup] [sup]by[/sup] [sup]ExcelToReddit[/sup]
The cagr on investment required to breakeven on a 10% interest loan is 5.33% if the tax is 10% like on equity investments or 6.59% if the tax rate is 30% like on Fixed deposits .
The calculation:
By this reasoning I have bought my car(in 2018) on Loan even when I had cash .
Edit: I changed my position . Here's is the final calculation:
If you have 1,00,000 at hand and want to buy 'X' there are two options
If you have cash to purchase say a car , it is better to purchase it on a loan and invest the amount suitably because the CAGR return needed to breakeven with interest cost is way lower than the bank interest rate. Here's a calculation demonstrating the same:
+
A
B
C
D
E
F
1
cost of purchase
loan interest rate
total interest expense(7 year tenure)
cagr return to break even(at 30% tax )
cagr return to break even(at 10% tax )
2
100000
8
30,924
5.36
4.3
3
100000
9
35,148
5.98
4.82
4
100000
10
39,450
6.59
5.33
5
100000
11
43,828
7.19
5.83
[sup]Table[/sup] [sup]formatting[/sup] [sup]brought[/sup] [sup]to[/sup] [sup]you[/sup] [sup]by[/sup] [sup]ExcelToReddit[/sup]
The cagr on investment required to breakeven on a 10% interest loan is 5.33% if the tax is 10% like on equity investments or 6.59% if the tax rate is 30% like on Fixed deposits .
The calculation:
- The total interest expense on column C is sourced from 'EMI calculator dot net' .
- how much amount is required to break even (for 30% tax bracket)= Total interest expense/(1-0.3)
- CAGR required to break even(Column D) . I sourced from 'cagrcalculator dot net' .
By this reasoning I have bought my car(in 2018) on Loan even when I had cash .
Edit: I changed my position . Here's is the final calculation:
If you have 1,00,000 at hand and want to buy 'X' there are two options
- Instead of buying 'X' by cash you took a loan at 10% interest rate for 7 years and invested the cash in a index fund at 8% XIRR .At the end of 7 years the total cash outgo Rs 2,39,450(total EMI=1,39,450+ invested amount=1,00,000) and your final invested value is Rs 1,71,382
- If you bought 'X' by cash and invested the emi's which you would have given in point 1 as SIP
into same index fund at 8% XIRR. At the end of 7 years the total cash out go is Rs
2,39,450(Cash purchase of X=1,00,00 +total SIP=1,39,450) and final invested value of Rs
1,89,000