[NFS]

Mods: I searched through the forum and was unable to find a thread discussing this. If you feel inappropriate, please do not hesitate to delete/move/merge the thread.

Respected BHPians,

The question here is which option to choose when buying a new car?

Options available here:

1. Cash purchase (close couple of FDs yielding 6% pa interest)
2. Over draft loan over FD (Offered on 2% above the current FD rate)
3. Car Loan (offered at 9.5% or above by various banks)

My evaluations:
Option 1: Loan processing takes considerable amount of documentation and time. Why NOT buy the car by cash
Option 2: Loan on FD which is otherwise known as Over Draft. Here my vehicle is not Hypothicated to the bank. Repayment can be planned as per ones convenience. No pre-closure charges and tenure of the loan can be decided by the loaner.
Option 3: Savings remain as savings and loan is available at 9.5% or so. Vehicle is owned by the bank. Many banks insist on duplicate key deposited with them. Cumbersome documentation, chances of getting another loan as Home loan eats most of the take home salary

What is the best option according to you all?

Any ideas?

[DieselFan]

In my view Cash purchase is best when you have FDs which are earning 6% interest. A 6% interest FD is actually yeilding less than 6% because of income tax. If you are in the 30% salary bucket then you would actually earn only 4.2% interest while taking a car load you would spend about 5.5% to 6% above the FD earnings which translates to 55 to 60 K Rs. a year. This will fill in your fuel requirements for the year if you travel about 15K Kms a year.

[mmxylorider]

For a fast depreciating item like a vehicle, cash is best option - Unless you have an alternate investment option earning more than the APR you are paying on your car loan. Here are some pointers though.
you might want to look at the putting money in company fixed deposit that would typically net you 12% compounded. Factor in tax and it balances out the loan APR. Big companies are safe bets and your principal is protected.
A good Mutual fund is a option to cover the APR - this strictly in my opinion, but that is a different thread altogether

As mentioned, vehicles on loan have the additional effort of registration clearance once the loan is repaid as well as the hassel during selling if the loan is active.

[NFS]

@dieselfan & @mmxylorider: Thanks for your responses. To my understanding here is what the calculation looks like:

For example:
Pricipal (borrowed money): 10,00,000 (10 lakhs)
Rate of interest: 9% per annum
Tenure (loan duration): 36months
Monthly payments (EMI): 31,799.00 (extracted from online EMI calculators)


At the end of 36months one would have paid
36 x 31,799.00 = 11,44,764 (extra of 1,44,764 above what was borrowed)

Say an FD of 36months of 10,00,000 @ 8%

2,40,000 Interest received at the end of 3rd year on Simple interest calculation

30% of 2.4 lacs as tax = 72,000 paid to the IT man

which is 2.4lacs - 72,000 = 1.68lacs

Do you think we have greater savings with going for Loans?

Of course the additional effort on registration clearance and selling when loan is active are noted

[aka_iitd]

I think better to go with loan
For 6% FD's break them and go for 8.5 to ~9% FD rates available
Loan processing is not much cumbersome these days

[mmmjgm]

My take on this .

Cash purchase (close couple of FDs yielding 6% pa interest)
Cash down is best. (Only if you are a salaried individual, and/or if you are not using the car for your own business, else its better to buy it on car loans, this is because you can claim the interest as a business expense stating you need to use to car to travel for business hence save tax.)


Over draft loan over FD (Offered on 2% above the current FD rate)
Do the math 2% above your own money, so nett result is that you will NOT be able to use the FD while there's a lien on them (loan against FD). Plus the rule for IRR (internal rate of return for banks) on a loan will not stop at 2%, there would be some other service charges, etc etc etc. When you need the money in an emergency while you are paying off the loan against the FD, you will be told by the bank to close (pay off the outstanding loan) before you can withdraw/break the FD. Again this depends upon the amount of principal loan which has been paid off. Then they hit you with prepayment charges :-(


Car Loan (offered at 9.5% or above by various banks)
Best if you cannot pay cash down for your car.

Look at it this way, when you sell your car years down the line look at what have you paid for it against what are you getting for it. This will help you minimize your losses.

[GTO]

Nice thread.

Originally Posted by NFS

Cash purchase

Don't agree with this for a new car. You can get a new car loan for 9.5%, and instead invest the cash in an investment with *atleast* 9.5% ROI.

I believe in paying cash ONLY for a used car, primarily because used car loan rates are so expensive (between 16 - 19%).

Over draft loan over FD (Offered on 2% above the current FD rate)

My first choice, whether for a new or used car. BTW, most nationalised banks offer OD loan on FD for 1% over. This is the absolute BEST option as:

- Turnaround time is 1 hour to 1 day only
- Reasonable rate of interest from your pocket
- Flexible repayment mechanism
- NO hyphothecation on your new car's registration

Here is a full thread on the topic

Car Loan (offered at 9.5% or above by various banks)

Only if option No.2 isn't workable.

[Aroy]

If you are getting no financial benefit for you car (depreciation, assured future income, etc), it is best to buy with cash. The advantages are
1. There is no extra out go for you in terms of interest on loan or on OD. Remember what ever they charge, you are paying for it.
2. Hassle for getting hypothecation removed are not there.
3. You are spending what you have, and not dependent on future income stream for meeting your obligation. So what if you loose you job, or your business takes a nose dive, one less problem to worry about!
4. In some case you can turn cash purchase to your advantage - take immediate delivery, wrest more discounts etc.

What we tend to ignore is that with every purchase we undertake with loan, we are benefiting the lender lot more than ourselves, apart from the fact that the monthly EMI which seemed so innocuous individually rear their ugly head when added up, and leave us gasping for breadth. Having to repay loans also inhibits adventurous spirit of taking professional risks, as monthly payments are always at the back of our mind, enforcing status quo.

[basilmabraham]

Nice thread. Good timing for me. my 2 cents

I am buying a Fiesta 1.4 SXi making good use of the year end discounts.

Wanted loan for around 4 lakhs. Approached SBI, did not want to try a private bank. SBI have a new credit check system, very similar to the Point Based Migration systems. The processing is cumbersome and the standard set by the bank enusres that most people get their loans rejected. There were many rejected loan applications and the manager could not do anything about it. Well, its for the good of the bank, but a common man suffers.

I could get my loan sanctioned if I put my dad as co-borrower. However this required dad to travel to where I live, get all documents for him as well and a further delay in the sanction.

So decided to take an OD from an existing FD. The rate is 8% annual, plus no return for the borrowed amount. The OD was done and money wired to my account in flat 30 minutes.
Advantages I see in this includes
- Car is not hypothicated, no hassles with closure of hypothication later
- No monthly EMI burden, I can choose to close the loan when ever I want. I can also skip an EMI without incurring any additional charges.
- No waiting period for the laon to be sanctioned
- Avoid all unnecessary documentaion burden

I however, want to make a fixed monthly payment to ensure that the OD closes in say 3 years or so. Rather than making monthly payments directly to the OD, I plan to start a high yeilding monthly SIP plan for a year, which I will close at the end of the tenure and pay in lumpsum to the OD. Please comment on this method.

The 2nd option looks best to me. A loan is always a burden, best avoided, when ever possible.

[ghodlur]

Originally Posted by GTO

My first choice, whether for a new or used car. BTW, most nationalised banks offer OD loan on FD for 1% over. This is the absolute BEST option as:

- Turnaround time is 1 hour to 1 day only
- Reasonable rate of interest from your pocket
- Flexible repayment mechanism
- NO hyphothecation on your new car's registration

Here is a full thread on the topic

If only I had got hold of this information earlier, I would have opted for this option. I went for an all out cash purchase reason being 1) Did not want to burden myself with another EMI in addition to my existing Home loan. 2) Did not want to pay an extra interest for an depreciating asset 3) Good discounts from dealer (read freebies) on cash purchase.

Hence redeemed some of my dud Mutual Fund investments and bought my Fiesta.

[mmxylorider]

I recollect reading on another thread related to insurance where the concerned TBHPian had to continue loan EMI payment while the resolution to the claim of a totalled/damaged car was underway. Not a big factor when we think about a car purchase, but such experiences make you think. I'm sorry, being unable to recollect the link to that thread.

[samsan02]

Originally Posted by ghodlur

Hence redeemed some of my dud Mutual Fund investments and bought my Fiesta.

Well! I don't think its a bad idea all together, instead look at it this way

1> Paying A emi makes you a regular in paying if you had a loan. I mean you are bound to pay emi every month so you will pay no matter what.
2> With OD loan thou there is no compulsion to pay every month as you are at leisure, but you may at times skip and at times have to feel the pinch to pay back more, so you monthly budgeting gets a affected, but its manageable with proper discipline.
3> Now when you say you redeemed your MFs, then I think what you did is not bad. Instead starting a SIP for the same amount you would have paid EMI otherwise had you opted for a OD loan would make more sense now.

[NFS]

Thanks to everyone for the excellent support on this thread. I would think more on OD on FD as an option since most of you are supporting it. My thoughts for your suggestions in bold below:

Originally Posted by samsan02

Well! I don't think its a bad idea all together, instead look at it this way

1> Paying A emi makes you a regular in paying if you had a loan. I mean you are bound to pay emi every month so you will pay no matter what.
Good Point, but you can now-a-days do a Standard Instruction to debit from your SB/Salary account as EMI to the OD
2> With OD loan thou there is no compulsion to pay every month as you are at leisure, but you may at times skip and at times have to feel the pinch to pay back more, so you monthly budgeting gets a affected, but its manageable with proper discipline.
Advantage, if you forget to pay an EMI, NO penal interested to be paid. Of course, I agree with you, that someone without discipline might really ruin the advantage of the setup
3> Now when you say you redeemed your MFs, then I think what you did is not bad. Instead starting a SIP for the same amount you would have paid EMI otherwise had you opted for a OD loan would make more sense now.

Originally Posted by mmmjgm

My take on this .

Cash purchase (close couple of FDs yielding 6% pa interest)
Cash down is best. (Only if you are a salaried individual, and/or if you are not using the car for your own business, else its better to buy it on car loans, this is because you can claim the interest as a business expense stating you need to use to car to travel for business hence save tax.)


Over draft loan over FD (Offered on 2% above the current FD rate)
Do the math 2% above your own money, so nett result is that you will NOT be able to use the FD while there's a lien on them (loan against FD). Plus the rule for IRR (internal rate of return for banks) on a loan will not stop at 2%, there would be some other service charges, etc etc etc. When you need the money in an emergency while you are paying off the loan against the FD, you will be told by the bank to close (pay off the outstanding loan) before you can withdraw/break the FD. Again this depends upon the amount of principal loan which has been paid off. Then they hit you with prepayment charges :-(

FD once booked on a rate of interest for 3 years, as far as I know, the rate of interest cannot be altered by the IRR. I am not sure if this is what you meant here, if not I might be missing something.

Car Loan (offered at 9.5% or above by various banks)
Best if you cannot pay cash down for your car.

Look at it this way, when you sell your car years down the line look at what have you paid for it against what are you getting for it. This will help you minimize your losses.

Also are there other options to funding a New Car? Scratching my Brain!

[basilmabraham]

Originally Posted by NFS

Also are there other options to funding a New Car? Scratching my Brain!

Loan against gold? This is more practical in South India, I guess. With the current rate of gold you get good money per soverign.

[Soccerfan]

Originally Posted by basilmabraham

Loan against gold? This is more practical in South India, I guess. With the current rate of gold you get good money per soverign.

+1. I know many who use agricultural loans@ 8% against gold for buying cars