Own funds or car loan? Choose smartly when buying your dream vehicle

3 MinsSep 09, 2020

Achint Kumar (30) is planning to buy a car that costs Rs 8 lakh. With a stable job and a monthly take-home salary of Rs 65,000, he feels he can afford it. Achint’s bank has offered him a car loan for up to 85% loan on the vehicle’s price. If he were to avail the loan, he would only have to make a down payment of Rs 1.2 lakh instead of the Rs 3 lakh he had already budgeted for it before he realized that he can get higher loan amount

What is the right course of action for him? To sort out his confusion, Achint consults a friend who is a chartered accountant, who asks Achint to consider some aspects before deciding.

dream vehicle

How will a higher down payment help?

The CA shows Achint the calculations indicating how much he would be paying on both options – a down payment of Rs 3 lakh (i.e. a car loan of Rs. 5 lakh) versus a down payment of Rs 1.2 lakh and loan of Rs 6.8 lakh.

 Rs. 5 lakh loan @10% for five yearsRs. 6.8 lakh loan @10% for five yearsRs. 5 lakh loan @10% for seven yearsRs. 6.8 lakh loan @10% for seven years
EMIRs. 10,624Rs. 14,448Rs. 8,301Rs. 11,289
PrincipalRs. 5,00,000Rs. 6,80,000Rs. 5,00,000Rs. 6,80,000
InterestRs. 1,37,411Rs. 1,86,879Rs. 1,97,250Rs. 2,68,260
Total AmountRs, 6,37,411Rs. 8,66,879Rs. 6,97,250Rs. 9,48,260

Calculation is representative

A higher down payment translates into a lower EMI (equated monthly instalment) every month, as well as almost 26% in savings when it comes to interest payments. Even though it is tempting to keep Rs 1.8 lakh cash in hand, it means EMIs that are roughly 40% higher over the tenure of the loan.

[Also Read: How you can get the best out of your car loan]

What are the other factors that one should consider?

Achint’s friend says that beyond the question of the cost of money, he should also ask himself the following questions:

a. Does the EMI amount exceed 15% of his take-home salary?

Ideally, an auto loan should not exceed 15% of one’s take-home salary. If it does, the customer is stretching themselves to pay.

b. Is Achint planning to take a home loan in the next 5-7 years?

The rule of thumb in personal finance is that EMIs should not exceed 50% of a person’s monthly income. This means that if Achint is paying, say, 15% of his income as a car loan EMI, and applies for a home loan, the lender may sanction a lower loan amount, as they may consider his repayment capability to be only 35% of his monthly income. 

c. What is his monthly surplus?

Achint needs to calculate his total outgo every month: Household expenses, mutual fund SIPs, insurance, credit card payment any other EMIs and after that arrive at the EMI he can pay for this car loan.

d. Does his future cash flow look good?

Achint has a stable job and hence, has a steady income. He needs to ask himself if he is expecting a raise anytime soon. If he is, and if he is not expecting any major expense shortly, he may opt for a lower tenure or larger down payment and a higher EMI. On the other hand, if he has a significant expense coming up soon (a wedding, or house repairs), it would make sense to opt for a higher tenure and lower down payment.

The friend’s advice to Achint is simple. Consider various factors and then take smart decisions. It will make his ownership of his dream car cost-effective and painless.

Axis Bank has many exciting offers on car loans, including loan amounts up to 100% of the on-road price and attractive car loan interest rates. You can avail a loan from the comfort of your home. Just check on your Axis Bank mobile app or click here. Remember, for its customers; Axis Bank is always Open, Dil Se!

Disclaimer: The Source, a Mumbai-based content creation, and curation firm have authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.