Car Financing Dilemma? Loan Or Down Payment

Car Financing Dilemma

Query: I am planning to buy a car and have the required amount with me. Should I take a loan, invest my money and use the interest to pay the EMI?

Hum Fauji: Car is a depreciating asset. If one buys a car, say, worth Rs 10 lakhs with loan for 5 years at 9.25% rate of interest (current SBI rate), one will pay back around Rs 12.52 lakhs total including interest while car’s resale value after 5 years will probably be maximum Rs 5 lakhs. Thus, a high interest loan is taken for an asset whose value is going down every day!

Unlike home loans, there is no tax benefit on car loans to cushion the high rate of interest. Also, to earn an interest of 9.25% on own investments safely to offset the car loan interest is not easy. So, as far as possible, buy a car without a loan.

(Query answered by Damanpreet Kaur, Financial Planner at Hum Fauji Initiatives)

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