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

    1. #11
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      I am very weak in the financial calculations, management. Taking loan then paying the loan back with additional interest, then take count on how many EMIs have been paid, then always maintaining the balance so that no EMI is bounced, then have to keep earning just for the sake of paying EMIs, then there is headache of closing the loan... it all feels a very tedious task to me.

      I prefer to buy the car only when i have money in my pocket. My car is fully mine and now I have to earn only for the fuel and the maintenance bills which i think needs lesser efforts for lesser needed earnings further. And there is peace of mind that no liabilities except keeping the car in pristine condition
      Last edited by Jack Sparrow; 12th Aug 2014 at 23:06.

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      Quote Originally Posted by kb100 View Post
      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.
      +1. The reason why we take Loans is to show depreciation in Books.

      Quote Originally Posted by Tj seera View Post
      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.
      Also, I'd like to add that a businessman cannot outright buy a car with 100% downpayment if buying/part payment from "money not declared" because the purchase has to be shown in Books. Else, you might end up in trouble with audit and stuff.

      I believe in minimal financial liability leading to peace of mind. "Jitni lambi chadar utna hi pair failao"(Live and work within your own limitations). One must also follow keeping a low profile and should be down to earth.
      Last edited by bamaboy; 13th Aug 2014 at 00:00.
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    3. #13
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      Quote Originally Posted by suresh_gs View Post
      liquid cash
      liquid cash need not be the bank balance in real sense. Mi10's post wonderfully outlines liquidity during repeat car purchase scenario.

      Quote Originally Posted by bamaboy View Post
      because the purchase has to be shown in Books.
      Context of Businessman and depreciation benefit is not the point of discussion here. It can still be valid for individual professionals who have multiple sources of income and can trade off the expenses against income to compute the taxable income.

      Salaried Individual, mostly Single Income, sometime double income, mostly first time car buyer, is the focus of the discussion. Should he/she take loan or save & buy, which is wiser ?
      Last edited by Nomad; 13th Aug 2014 at 00:52. Reason: Back to back posts

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      Interesting question, In today's world where everyone life conditions are different, buying a car on loan or with 100% down-payment completely depends upon the individual financial capabilities. Loan is an instrument which allows people to buy something in current time based upon their future expected cash-flows. From a person perspective who require a car but does not have full cash in hand at the moment, taking a loan make complete sense (Expecting he will earn more than the car loan in future).

      Now lets see from a salaried person perspective who have money in hand and is confused to go for loan and invest that money somewhere or go for 100% down-payment. Lets compare both the scenario without considering the time value of money:

      lets consider that the person go for the 5 year car loan of Rs. 5 lakh with the interest rate of 12%. in the 5 year time that person would end up paying around Rs. 6.67 lakh (Used SBI website loan calculator). He will have to pay Rs. 1,67,333 as interest.

      Now as this person has taken loan, he has choice of investing the money he has in his hand. Let consider he had 5 lakh as that is the money required to do 100% down-payment. If he invest that money in fixed deposit on average he should earn close to 10% every year. Now we have to take inflation also into consideration as once he receive the amount after the completion of fixed deposit, the purchase power of that money will change as per the inflation rate. The real inflation rate in our country as per CPI (Consumer price index) has been more than 12% for last couple of years. Lets consider an average of inflation rate for these 5 years around 6% when a country is doing good. His real interest rate earned would be 4% (FD interest - Inflation). His total interest earning in 5 year based on the real interest earned will be Rs 1.08 lakh.

      Now if we take the interest he earned and car loan interest which he have to pay into consideration, as per above scenario he have to pay close to Rs 59 k from his pocket to complete the bank loan.

      The above calculation tell us he would have been better off by paying 100% as down-payment and could have saved close to Rs 59000 by not going for a loan. From the asset classification perspective, a car is a depreciating asset which means its value will decrease over time and financially it is not good to take a loan for depreciating asset.

      Note - If we go by the current inflation scenario of our country, the average inflation for last years have been more than 12%. The real interest rates would be negative. Let me show you by an example:

      - you put Rs 100 in bank for fixed deposit and receive interest of 10%. After a year total worth of that money will be 110. Now the inflation is around 12% so now once we take this into consideration the purchasing power of Rs 110 is equal to Rs 96.8. This means due to high inflation rate in-spite of earning 10% interest rate, the person lost 3.2% value of his money.

      If you can invest your money at a place where the interest earned is higher that bank loan rate plus inflation, go for a car loan OTHERWISE in the high inflation environment it is always better to pay 100% down-payment.
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      If you have free flowing cash and want to buy a car for your son - Cash!

      But usually this is not the case. A small family of two decides to buy a car, there are other expenses involved - Why not the home first!? It saves tax too.

      What I have learnt is that a Middle class family can never go free on cash at any moment of time. So, for this first time car buyer, here is my suggestion:

      1) You are living in a rented house, No savings at all - Save a lakh, do the down payment and take the car. If you think that you would do a full cash payment, you would eventually get a lower spec car than what you actually needed. This forces you to stick to a car which you may not enjoy. And also, this takes away the fun of owning a car when you actually want to go places and have the energy to do so. When you needed the car the most; when your wife got pregnant and later you got your first child. So the recommendation - Go the EMI way.

      2) You are living in a rented house, you have enough savings to buy a car on cash.. Yes you opted to get married in your 30s I know! or you got ancestral property share or whatever! Go buy the car you want on cash. The next buy would be a house, its better to have one EMI rather than two!

      3) You are living in your own house(your's, father's, grandfather's etc) - Buy the best car you can on EMI. Dont settle for less.

      EMI and peace of mind are two different aspects. Some people think that EMI takes away your peace of mind. I dont think so. They only take away your peace of mind when you are stretched by it. Choose an EMI that suits you and gives you the flexibility. When you can afford a 3 year EMI by stretching, take a 5 year one without stretching.
      Buying a car on EMI should actually remove your tensions. You have a car sitting in the basement in case of emergency.
      Just like buying a house. If one can afford a 30 lakh loan for 10 years, take 15 years EMI. Keep on saving parallel and keep making pre-payments. I try to keep two times the home loan EMI handy in liquid investments, just in case something happens, one should be able to sell the property in these two months! Though there is always someone to fall back on.. but this is my way of keeping myself at peace without depending on others. Own Car and Own Home are luxury.. one should always be ready to part with luxury in emergency situations. If you are open to it.. no EMI can make you tense. If you are closed to it - You are always in tension. This is one reason why no bank will give you 100% loan on a home loan even when your salary statement proves that you can afford 300% of the stated EMI.

      Of course there are lot of other factors like parents or family members health concerns, one/two kids, their education etc etc discussing all of them would be like reading biographies of 10-20 people about how they managed their expenses.

    6. #16
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      Quote Originally Posted by Mi10 View Post

      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.
      Different people have different opinions.. If I were you, I would pay 5 lakh down payment and take the Civic(any other sedan of your choice) and pay the remaining amount through EMI spread over six/seven years. After seven years, I would think about upgrading.

      Calculation: Year of purchase 2005. Seven year loan. 5 Cash + 6 loan = 11 Lakhs. I pay 5+8.9 lakhs in 7 years = 13.9 lakhs. (calculated from EMI Calculator for Home Loan, Car Loan Personal Loan in India with 12% interest rate)

      How much you would have paid. Year 2005 = 5.2 lakhs, Year 2010 = 7.2 lakhs, Year 2011 = 11 lakhs. Total Expense = 22.4 Lakhs.

      Those initial 5 years of your life on the swift if replaced by a civic!! How do you feel about it? This is my way of doing things. I had 1 lakh cash, I bought the Santro with 5 year long EMI, so that I could enjoy it with full throttle! If I had 5 Lakh cash and no other loan I would go for a 10 Lakh car.. or a 10 lakh used car in 5L (from a reliable source) if I had other loans to attend to.

      Some people just hate the word 'Used'. I dont have any inhibitions to it. One can sit 'super excited' for 44 hours/month in an airplane on a seat that is used by 10,000 other passengers(drunk, non-veg, smelly, lower caste and many other Indian taboos) but cant sit for 20 hours/month in a used car which he bought on his own money!
      I dont care about such things.
      Last edited by muztariq; 13th Aug 2014 at 02:07.

    7. #17
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      You live only once! 5 years gone waiting for something is five years that are not going to come back! My funda is clear .. live for today - tomorrow will sort itself out!
      Last edited by kb100; 13th Aug 2014 at 17:25.
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    8. #18
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      Quote Originally Posted by Nomad View Post
      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.
      Disclaimer: This is a hypothetical case or worksheet model. All events, assumptions, guesstimates are as written down. Calculations and Interest Rates are fact gathered from HDFC bank website (reason: top of the google search list). all value rounded off to nearest 1000 rupees.

      Yesterday one of my friend bought an Ertiga Vxi CNG at Mumbai for 7.8L OTR with 100% down payment. Profile of this person is as below

      * In his early 40s, employed with private sector,
      * Lives in his own house with his old parents, wife and two kids of age 10+,
      * Daily running is 60-70 KMs, self driven, No driver, no one else in the family drives the car.
      * Some days he joins a car pool (colleagues), some days in a month he drives to Pune on work.
      * Some days (2-4 days) in a month he is on business trip to project sites or to meet clients
      * He needs a 5+seater vehicle few times a year, when his entire family travels with him.
      * Single income family
      * Focus is on children's education, parents healthcare, payment towards home loan EMIs and savings for the future.
      * This is his 3rd car, he always bought Maruti, earlier cars being WagonR and Baleno
      * He wants a reliable, risk free family car, prefers low running costs, hence chosen Ertiga Petrol+CNG variant was chosen

      I did a back of the envelope calculation whether this decision was wise one or not.

      Assumptions:

      1. HDFC Bank Interest Rates, EMI/RD/FD Calculator has been used.
      2. If he would have opted for a loan, he would have got 70% of OTR value as financing, 30% as downpayment
      3. EMI tenure of 5 years
      4. Now as he does not have a loan, he will open an RD account with the bank for 60 months, amount equals the EMI value
      5. He will sell the car at end of 5 years, he will get a salvage value of RS 250000/-

      Below chart shows calculations with Loan + 5 Year EMI and with 100% down payment + 5 Year RD. It also shows positives and negatives of both methods as seen by me.

      Click image for larger version. 

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      Only question is how one can get money for 100% down payment. Following is my guesstimate.

      * He sold his old car for RS 100000/-
      * He had collected RS 250000/- anyway for down payment in case of a loan.
      * He got a lum-sum bonus or award equal to 1-2 months salary
      * He liquidated very low yielding mutual funds (compared to Auto Loan Interest Rate)
      * He had planned to do this and had started an RD some 3-4 years ago which got matured now.
      * There could be more...

      Is it wise to go for a 100% down payment while buying a car ?


      Answer: It depends on you and your priorities. You may decide accordingly
      Last edited by Nomad; 9th Sep 2014 at 01:28.

    9. #19
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      Issues with the calculation :

      1. What happens to saved loan cash which is not paid in scenario one?
      2. RD money calculation is above the budget pool.

      Taking loan is better mathematically! Period! Keep it short for for 2-3 years for car and roughly 15 years for house. Take loan even if you have bank balance.

      A MUST in case of Home loan! Tax benefits of 30% will offset any calculation.

      "Peace of mind" though sounds good - but is a plain myth in today's world. If you still need peace, console yourself by saying that loan is better & meditate for 15 mins!

    10. #20

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      I don't prefer a life with loans, but sometimes we are bound to take loans.

      When I had bought my second car, vista, in year 2011, I had bought it at 50% down payment for on road price of 6l, though I had cash (all tax paid, lying in my bank account) more than 40 times my loan amount, all because I was looking to buy my first house and wanted to buy the house without loan, which I did 3 months after my car purchase. As I had cash left after house purchase, I paid the full loan in next 3 months. Even though the loan amount was small at 3l, I felt relief at closing the loan.

      Next I had to take loan of 30l to buy plot adjacent to my house, which constituted about 30% of plot cost, and I closed that loan within a year. All because I do not like living under burden of loan.

      My next car purchase, in my company's name, all on cash and no loan, despite the so called benefits of the loan. For an entrepreneur, a loan is a big headache and should be avoided as it might effect peace of mind and future actions due to loan liability.

      If I look back, in year 2007, I could have bought a very nice house (double of my current house) for 1.3 cr after taking loan of 50% of the amount. I was part of another company at that time. In year 2009, due to some reasons we had toclose that down. With a new set of people, I started a new company, and I was able to finance the sustainance of company and also could support my new co-founders who had not much stronger personal financials and also take care of my family expenses for a year, until new company started to generate revenue. All this was possible due to liquidity, else I would have been searching for a job at that time. So it helps. I missed on that beautiful big house but not taking loan to buy that house proved to be a good decision.

      So I have bought car/house/plot both with and without loans. It all depends upon the financial condition at that point of time.

      Edit: I know a fellow entrepreneur who had to stop trying as business did not do good, and was forced to take up job to pay his house loan emi his words of advise were, never take loan if you are an entrepreneur.
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