Should You Buy a Used Car in Cash or Take a Loan? Find OutNow! - Baltic Master
Should You Buy a Used Car in Cash or Take a Loan? Find OutNow!

Should You Buy a Used Car in Cash or Take a Loan? Find OutNow!

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Being able to pay for your used car in cash may seem like a smart idea. It ensures you are never troubled with Equated Monthly Installments (EMIs) or having to search for the best loan option.

However, most people are not lucky enough to have the entire amount needed to buy a second-hand car. They often rely on financing to purchase the vehicle. Even if you are able to pay the entire amount in cash, it may not be the best option.
Here is why you financing the purchase with a used car loan. One benefit is that if you take a loan, you may be able to afford a better car. This means you are able to expand your possibilities using financing.

However, you may think that you will have to deal with a higher used car loan interest rate if you opt for financing. Furthermore, you may have the additional burden of paying the EMI in a timely manner.

Although these may appear to be major drawbacks, paying in cash is not always prudent. If you enjoy a good credit score, you may be able to avail of a used car loan at a competitive rate. The amount that you save by choosing the financing option may be invested in financial instruments that earn good returns.

Here are two situations when availing of a loan may be a better option.
  1. If you are self-employed Assume that you want to buy a car that costs INR 10 lakh. A 20% down payment means that you pay INR 2 lakh and the balance is funded with a second-hand car loan. If you buy the car in the name of your firm, the interest is eligible for tax deduction. If the rate of interest is 12% per annum, the EMI for three years will be INR 26571.

    Particulars Amount (INR)
    Car value 1000000
    20% down payment (a) 200000
    Loan amount 800000
    EMI 26571
    Repaid amount (b) 956556

     Assume you invest the INR 8 lakh in a fixed deposit, which delivers 10% post-tax returns (quarterly compounding) in three years. Your investment at the end of three years will grow to INR 10.75 lakh.
    The interest paid (INR 156556) is tax deductible. The total cash flow at the end of three years is calculated as:
    1075911 – 200000 – 956556 + 156556 = INR 75911
  2. If you are salaried Assuming that all the above variables remain the same, you invest in a Systematic Transfer Plan (STP) of a debt mutual fund. You invest INR 8 lakh in a fund that delivers 8% returns per annum. You transfer INR 22222 each month to an equity fund that earns pre-tax returns of 20%. Your investment will grow to INR 12.12 lakh after three years.
    The net benefits of availing a car loan is calculated as:
    1211637 – 200000 – 956556 = INR 55081
If you are salaried but are risk-averse and invest in safer instruments, availing of a loan for a used car is not recommended. This is because; the returns on your investments will be lower than the interest rate. However, if you do not have the money and are eligible for a competitive rate, it is advisable to apply for a loan.

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