- Here is something to consider before buying a car.
- There are options of either buying a car with cash (full payment) or taking out a loan.
- We shall analyse each aspect to decide which one suits you the best.
Before buying a car, there is a common question of whether to go for a loan or buy the car by paying the full amount (cash). Well, there are definitely merits to both of these situations. Generally, people have the option of either buying the car by paying the full amount straight up or taking a loan from a financial institution that they could repay in 3-5 years (even more in some cases). But the latter attracts a lot of additional amounts due to the high interest rates that people could easily forget during the EMI repayment cycle. Let us see which one makes sense.
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Buying a Car with Cash vs Loan
In the case of loans from banks, you must take some time out to research what various credit institutions offer you in terms of repayment methods, interest rates, and whether or not there are penalties associated with early repayment of the loan. Remember, a car is a depreciating asset and one can’t clear the loan amount by selling it in the case of emergencies because the value of the car depreciates significantly each year. But the EMI can ease off the burden significantly.
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However, it must be understood that the EMI should not be more than around 10% of your take-home income. Also, you must keep in mind that the interest rate over a period of around 4 years would result in around 25% of the actual cost of the car. Hence, a car worth Rs 10 lakh might end up costing you around Rs 12 lakh even after paying around Rs 1-1.5 lakh downpayment. That is the downside of the car loan.
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On the other side, if you wait for some time and save money using SIPs, you could get the car at full payment. Considering moderate returns of around 7% per annum, you could save around Rs 10 lakh by paying a monthly SIP of Rs 25,000 in 3 years. This SIP amount could be considered the same EMI that you would’ve paid for the loan. Hence, if you are not in a hurry to get a car, you could consider this option and save the additional amount you will need to pay in the form of interest. There is a middle way where you can save for a large down payment so that your EMI and interest could be significantly less.
