The Buyt Desk
Ravi had a dream of owning a car from his childhood. After getting his first job, he fulfilled his dream and purchased a car worth Rs. 10 Lakhs on a five-year loan tenure. Ravi didn’t have enough money and did not make any down payment. Instead, he took a car loan and made zero down payments. Do you think Ravi made the right decision?
Many of you will say yes as at least Ravi fulfilled his dream of owning a car. But at what cost? There is nothing wrong in achieving your dream but when it is linked to your wallet then financial management matter as well.
Ravi purchased a Rs 10 Lakh car with no down payment as he didn’t have the down payment amount. Otherwise, it would have been 10-12% of the car value, i.e., around Rs 1 lakh of the down payment.
Assuming he got the loan at a 9% interest value for five years. His EMI would be Rs 21,049. According to this calculation, he would pay Rs 12,62,938 for the car after five years. The total interest he would pay is approximately Rs. 2 Lakhs, 48 thousand.
What would have happened had he waited a few years to accumulate the sum and get the car all in cash?
Suppose Ravi invested Rs 21,049 in a monthly SIP offering a 9% return for three years (9 % is an average return a SIP offers).
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A SIP of 21,000 for three years with 9% interest would fetch him Rs. 8,77,613
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A SIP of 21,000 for four years with 11% interest would fetch him Rs. 12, 80,725.
In addition to that, a car is a depreciating asset. Its value gets cut down to 25% right after coming out of the showroom. So, after five years, by the time the car loan tenure end, its value will come down to half.
On the other hand, if Ravi chose to invest the EMI cost in SIP, it would fetch him more money than his car value and keep him free from liability.
Furthermore, these days maintaining a car is getting costlier with the rise in fuel price and maintenance costs. Also, taking the car out in traffic is no less than a pain.
Conclusion – If owning a car is your dream and you believe it would increase your productivity, then buying it on loan is worth it. But, if there is no urgency, there is no point in buying a car on loan. Instead, invest the amount you can spend on EMI and purchase it in cash after a few years. Even a 50-60% down payment can cut down the significant interest amount.
