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    Thread: Consumer Opinion: Is it wise to buy Cars without Loan, with 100% down payment ?

    1. #1
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      Consumer Opinion: Is it wise to buy Cars without Loan, with 100% down payment ?

      Today, majority of Car Sales is through Financing, Other popular instrument is Leasing (through employer), A very small % is through company owned, company provided cars. Financing has made car purchase possible for many middle class citizens of this country, there by realizing the dream of driving own car.

      Recently a relative relocated from UK, he was away for almost 15 years, returned lock stock barrel, started afresh without any credit history here in India. He bought a Wagon R with 100% down payment. Few years ago, few of my colleagues who had relocated from USA, had again bought their vehicles (Toyota Innova) with 100% down payment. I have another colleague, who had bought a Tata Indigo without going for any loan, but partly financed by sale of his previous vehicle, rest from savings.

      Many of these families are Single Income families except for one, all of them are salaried professionals All above examples indicate that it is possible for salaried people to buy vehicles without opting for car loans.

      My own calculations tell me that Financing is approx. 12%-14% of the total cash outflow over 5 year ownership period. I have spent close to 275000/- on car loan interest and foreclosing charges on Happy Car. on previous car Palio which was a company owned company provided vehicle, the lease amount was approx 18% of the cost of the car which works out to be close to RS 90000/- In 12 years, i have spent about 265000/- as financing cost, approx 22000/- per year, which could have been used to fill the fuel into the car. Is it possible to save this kind of money without going for a loan or a lease ?

      There is another side of it, Spending RS 500000/- or RS 1000000/- upfront also mean loosing interest on the saved money, this works out around 8-9%, more over we lose the cushion of cash pile which gives comfort feeling for rainy days of the future.

      This question has been on my mind since couple of years already. Thought of having this discussion with all of you as i have nothing much to do since Sunday as i am nursing a hurt back due to fall into a ditch near Kudremukh on saturday.

      So the questions are ...

      * Is it wise to buy a car without a car loan ?

      * What is the right ratio of finance from saving : finance from loan to get minimum financing costs ?

      * How a single income, first time car buyer, buy a car without a car loan ? How much and how long he should save to buy his first car (say a RS 5L Hatch Back)

      * How a repeat buyer upgrade to a higher segment car without opting for a loan ?, is it possible ?

      Assumptions are:

      * Car can be new one or refurbished & pre-owned car.
      * The person is Salaried, able to afford the EMIs, is credit worthy
      * Any borrowing from parents, friends, family members, credit societies, finance companies, banking, gold pledging etc is considered as loan.
      * No depreciation benefits can be availed.
      * At max double income scenario can be included.

      Let me know your thoughts, opinions. Creative souls are welcome to share their spreadsheets, calculations etc.

      Last edited by Nomad; 15th May 2015 at 08:32.

    2. #2

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      Good topic to discuss, Nomad.
      In my opinion, atleast 30-40% should be financed even if we have money, due to the rainy future as you quoted. It always better to have some cash for unknown scenarios.

      Well, I did the vice-versa and opted for 60% loan and rest downpayment

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      Quote Originally Posted by Nomad View Post
      So the questions are ...

      * Is it wise to buy a car without a car loan ?

      * What is the right ratio of finance from saving : finance from loan to get minimum financing costs ?

      * How a single income, first time car buyer, buy a car without a car loan ? How much and how long he should save to buy his first car (say a RS 5L Hatch Back)

      * How a repeat buyer upgrade to a higher segment car without opting for a loan ?, is it possible ?
      Nice topic, Nomad sir.

      In my family we take decisions based on two important criteria apart from Money in hand.
      Economy - Inflation vs Deflation
      Interest % offered by banks

      If the Economy is experiencing Inflation and is expected to continue in same vein, then loan from Banks makes sense. Since the 'Time Value of Money' ensures you will stand to benefit.
      Most Private banks charge upwards of 14% + Preclosure charges and other nonsense. However there will be some time where State Run / Central Run Banks offer superb / Attractive interest rates. Of Course, it cannot be anticipated - but one should ask around before going for loan with Private Bank.
      For Example my Fiesta OTR was 8L. We got to know of an Offer from Corporation Bank that first 2 years it will be 8.25% and rest Floating Interest Rate. So we took 4 Lac Loan for 3 Years. Similarly when i had i10, took 2 L loan for 3 Years, because we found the Interest Rate Attractive.

      It is also always good to go for loan, even if you have cash, since liquidity always has more value. However, we never opt for beyond 3 years of Loan (Tenure).
      Usually prefer 50:50 or 40:60 (Loan : Down payment) - I don't know if its right or wrong, but we find it suitable when paired with short Tenure (3 years)
      We brought Swift with Full Cash (5.2L), When we sold it after 5 years, we got 3.2L. This 3.2 + 5L got us a Verito. Which we sold in 1 Year. That Sale value of 6L + 5L got us the Rapid. No Loans, but because of the value of existing car, we didn't feel the pinch when going full cash. Had it been a scenario of greater than 7L for a car - Then surely we would have went for loan.
      our Profile is all Salaried.
      Last edited by Mi10; 12th Aug 2014 at 13:19.
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      Financing always makes sense than going for full downpayment unless you are businessman with blackmoney.

      I will agree partially with inflation concept, however since car is a depreciating asset and as such in a lender books they will always have a SPV attached to it.

      I will look at the automobile industry outlook, also quarterly performance that would tell you easily that at what point of time you can get better deals and lower interest rates for cars. Full payments can be saved and you can put them in bank or some performing assets for interest / ROIs and use that money to fund installments on your car. That way you keep the capital intact and at same time finance a car.

      Other benefit is , if you are employed and your company offers car lease benefit, you can buy a vehicle at far lower or zero interest rates through your company and still claim alot of tax savings.
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      It depends on the %age difference between the loan interest rate and the saving throughput that you can achieve. Ask me, and I will say do not take the loan, since I always invest in non-risk savings and that is 10% and below. Car loans are 10+

      Same you ask my friend (hard core stock addict & he is good too). He would say take a loan since the returns on the money saved is better than the loan %age.

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      For me anything I go without loan. Peace of mind is priceless
      Last edited by machi vijay; 12th Aug 2014 at 20:01.
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      Let me first outline my feelings...

      Loan is a great instrument of financing when one does not have adequate money needed for the acquisition. I have used loans for my engineering education and apartment purchase when i wanted finance in real sense. I have also used the company lease as well as bank loan as a financing instrument for car purchase. My personal opinion is auto finance loan is better than company lease, but largely depends on the company policies. Loan as a financing instrument is not good if total EMI outflow exceed 40-50% of total bring home income and one is not in the growth stage of one's career (40+ years in current times), and loan is majorly (80%) not used to acquire appreciating physical assets (land and home). I do not endorse loans as a financing instrument towards Gold & Jewelry, Shares & Stocks, Travel & Tourism.

      I have also bought the stuff without any loans as well. Home Appliances, Home Entertainment Devices, Home Furnishings (three cycles already) and Mobile Devices etc have always been bought with 100% down payment. I have seen my father re-build his ancestral home without any loan from his retirement corpus. I have even bought a home without any loan. It is absolute peace of mind as expressed by machi vijay.

      But feelings could be different than facts, sometimes. Actually it is wise or not depends on mathematics, have to build a worksheet model to simulate different scenarios and workout net cost of financing. hopefully if time permits, i plan to do it in coming weeks, once done will share the same here.

      Last edited by Nomad; 12th Aug 2014 at 21:10.

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      Quote Originally Posted by Nomad View Post
      I do not endorse loans as a financing instrument towards Gold & Jewelry, Shares & Stocks, Travel & Tourism.
      ON the other hand - take a loan if you are investing in instruments/things that will give you a higher rate of return than your interest costs.

      This is reasonably tricky - yet simple.

      For individuals -

      Taking a loan will allow you to enjoy the purchase TODAY - instead of waiting for it to accrue - by which time both your desires (and the price) would have moved on. All the monies you spend will come out of your POST TAX income. Company lease can reduce this burden drastically and you pay tax only on the perk value. Different companies have different HR policies governing this. Some will be simple - the others will make you a slave for the period!

      For businessmen,

      Makes most sense to go for a loan since the COST of owning it can be written off as expenses (pre-tax). Cost of registration, insurance, Taxes, maintenance, fuel, even a driver can be reduced from your PRE-TAX income. You will have to show the vehicle as an asset and will be able to depreciate it at the prevailing rates (It used to be 33%.. don't know now). If you opt for a lease then even this need not happen - everything can be written of as expenses.
      Last edited by kb100; 12th Aug 2014 at 21:47.
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      Quote Originally Posted by Nomad View Post
      Is it wise to buy Cars without Loan, with 100% down payment ?
      It all boils down to how much liquid cash you have in your bank balance. If you can pay the amount in one shot and still have surplus cash in your balance , why would one want to go for loan.

      During my tenure in chennai in 2008, my colleague paid the full amount to buy Santro GLS (3.8 lakhs) while i went for a loan due to some financial crunch.
      Last edited by suresh_gs; 12th Aug 2014 at 21:07.

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      Quote Originally Posted by suresh_gs View Post
      It all boils down to how much liquid cash you have in your bank balance. If you can pay the amount in one shot and still have surplus cash in your balance , why would one want to go for loan.
      Forgot to add.

      Going for a loan when your capital is doing nothing but lying in a bank is stupid. 'Peace of mind' is a misnomer. Buy the car cash down... should should that 'rainy-day' come to pass, you can then take a loan for the required amount. Chances are by then your savings position would have improved as well.

      The other approach is to REDUCE your interest costs. Put your money in a FD and take a loan against that - You should be able to get it for 2% higher than what the bank pays you - so effectively your interest costs = 2%. This will work in most Nationalised banks.. Private ones rather have you paying the retail game!

      FD is a Capital Eater. Please bear in mind that with declared inflation rates of 8-9% the actual street level inflation is more in the 15% region, your money is worth lesser and lesser each day that it lies in the bank.
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