[varkey]

Originally Posted by capnemo

Thanks rx100. I wasn't aware SBI was offering at a reducing basis. Atleast HDFC I know, is offering flat rate auto loans.

Not just SBI, even HDFC provides it on reducing balance basis. I don’t think I’ve seen flat rate auto loans other than from smaller non banking loan providers. I’ve my BoB Car Loan also on reducing balance. In fact I’ve noticed that loans on reducing balance is the norm at least from major banks, and flat rate loans are an exception.

[PRATAYA]

Opting for a loan instead of a full down payment can reduce IT scrutiny since loans often provide a clear paper trail for financial transactions. However, going the full down-payment route is more straightforward if your income and tax filings are in order.

[freakmuzik]

Researched on this topic before taking my Car Loan and wanted to share how I finally decided to take a full loan.

Loan Amount: 14,00,000/- @ 8.7% interest on reducing principal basis.
EMI = 22,347/-

FD: 14,00,000/- @ 7% Monthly Compounding (Quarterly compounding would have been more ideal but considered Monthly for easier calculations)

I considered reducing my EMI from the FD principal and calculating the next month's EMI from that Principal amount and repeated this till the Principal hits negative. In such a scenario, I can easily consider taking a loan for 6 years while enjoying not paying lump-sum right away. Does it give any financial advantage? Yes, over and above the emergency fund I already keep, I have more liquidity. Plus, for someone who is good at investing, they might be able to reap better returns on this fund.

Here's a PDF of the rough calculation.
FD vs Car Loan Calc.pdf

Based on this, I opted for a 7 year loan that can be closed anytime without any penalty. For more light, I'm open to all your views and interpretations on this and feel free to correct me if I'm wrong anywhere.

[rx100]

Originally Posted by freakmuzik

Based on this, I opted for a 7 year loan that can be closed anytime without any penalty. For more light, I'm open to all your views and interpretations on this and feel free to correct me if I'm wrong anywhere.

If considering ONLY the financial benefits then one has to earn more than loan interest rate with that money to gain something. Anything earning below loan interest rate is a loss like 8.7 % vs 7 % in your case.

[freakmuzik]

Originally Posted by rx100

If considering ONLY the financial benefits then one has to earn more than loan interest rate with that money to gain something. Anything earning below loan interest rate is a loss like 8.7 % vs 7 % in your case.

I hope you are noting that the car loan has interest calculated on reducing principal and not on the full principal over 7 years. That is where the catch is. 7% compounding interest on an FD yields more than an 8.7% interest on a reducing principal loan.

[rx100]

Originally Posted by freakmuzik

I hope you are noting that the car loan has interest calculated on reducing principal and not on the full principal over 7 years. That is where the catch is. 7% compounding interest on an FD yields more than an 8.7% interest on a reducing principal loan.

Please try to understand how EMI works, and please check loan amortization table.

If things are this much simple why should bank issues loans when they can deposit same on FD at lesser interest and earn more. Nothing more to add.

[freakmuzik]

Originally Posted by rx100

Please try to understand how EMI works, and please check loan amortization table.

If things are this much simple why should bank issues loans when they can deposit same on FD at lesser interest and earn more. Nothing more to add.

To my best knowledge, I have tried understanding how EMI works and how the repayment of the principal and interest is spread and how the interest is calculated and how much interest I end up paying at the end of 7 years, I do have the amortization table and the overall calculations in front of me and I still feel it makes sense.

I mean, if you have the time and patience, more explanation to this would be helpful to me and others who are having my perspective.

[theCoder]

I was in similar situation last year while purchasing a car and I asked below questions to myself

1. Do I have funds for outright purchase? - Yes

2. Instead of outright if I put these funds in debt/liquid funds and to SWP to manage EMIs, will there be significant monetary benefits? - No

3. If I used these funds for outright purchase, do I have enough additional funds to cover any emergency? - Yes

With these answers, I went with outright purchase in the end.

Only benefit I see is that to not to deal with all loan processing and hassle of getting hypothecation removed from RC card after load is repaid.

Originally Posted by freakmuzik

I considered reducing my EMI from the FD principal and calculating the next month's EMI from that Principal amount and repeated this till the Principal hits negative.

In your case, does your bank provides option to withdraw from FDs? If not then SWP from debt/liquid funds could be an option but with STCG/LTCG tax implication.
Or keep the funds intact in FDs or other investment instruments and manage EMIs from income source. With this option there could be some monetary benefit after loan period.

[freakmuzik]

Originally Posted by theCoder

In your case, does your bank provides option to withdraw from FDs? If not then SWP from debt/liquid funds could be an option but with STCG/LTCG tax implication.
Or keep the funds intact in FDs or other investment instruments and manage EMIs from income source. With this option there could be some monetary benefit after loan period.

I'm not that great with Mutual Fund knowledge so I did not even go there.

I did not consider touching my FDs and the EMI payments will be from my income source. Since elsewhere in this thread, when someone spoke about Loans being calculated on reducing principal and the right way of comparison being deducting the EMIs from the same principal amount kept aside in FD, I did that and shared it here. Even then it made sense to me.

My Logic:

• Loan amount = Rs. 14,00,000
• Total amount including interest that I'd pay after 84 months: ~ Rs. 18,77,000 in EMIs of 22,3xx
• My FDs of Rs. 14,00,000 would ideally earn me around Rs. 23,00,000 in the same period
• But if I consider withdrawing my monthly EMI of 22,3xx from my FD principal and calculate earning interest on the remaining Principal + added interest from the previous quarter/ month, I'd exhaust my funds in approximately 6 to 6 1/2 years considering a 7 percent interest for the FD.

Which, to my logic, meant I can pre-pay and close my Loan by that time without essentially losing money and it did not make any financial sense to me to put down 14,00,000 fully even for a depreciating asset for which I'm getting a pretty nice loan rate and a decent investment option on the other side.

[speed79]

Being an entrepreneur and been running a small company since 2005, we feel that loan is a big mental burden.

March 2011: We had zeroed in on Indica Vista. It was around 6L on road. Took a loan from SBI (Max Gain) for 3L as we were in process of searching a house to buy and we did not want to take loan for purchasing the house. In July 2011, we bought our first house. August 2011, we pre-closed the car loan as we had enough money left after purchasing the house.

September 2015: Bought Tata Safari Storme Vx 4x4 in name of my company. No loan.

September 2022: Bought Tata Punch in name of my company. No loan.

January 2023: Bought a used Tata Hexa XTA in name of my company. No loan.

For me and my wife, loan is a liability we try to avoid. We had taken 2 loans for property purchases in 2013 and 2018. Both cases we had taken loan only on 25% of total cost, and had pre-closed these loans in 1 and 3 years while original loan repayment schedule was 10 and 15 years respectively.

Originally Posted by freakmuzik

My FDs of Rs. 14,00,000 would ideally earn me around Rs. 23,00,000 in the same period

What your are missing here is that the interest earned on FD will be taxed. If you are in 30% income tax bracket (31.2% including cess), the effective interest earned on FD would be 4.802%. So you can re-work using the effective interest rate.

[freakmuzik]

Originally Posted by speed79

What your are missing here is that the interest earned on FD will be taxed. If you are in 30% income tax bracket (31.2% including cess), the effective interest earned on FD would be 4.802%. So you can re-work using the effective interest rate.

Firstly, nice to know you have this amazing journey with Tata cars and esp the Hexa!

And yes, if the taxation is 30%, that's how it would be. In my case, I earn FD interest between 7.5% to 8% and post tax, I figured I earn around 7% so just used 7% for this calculation. Even with 5% as interest, it still works for more than 60 months!