Cash or Finance for buying a Car

Thinking of buying a new Car, Cant make up your mind whether to get it financed or pay by cash for the entire car, cash which is lying in fixed deposits/mutual funds/wherever....

Well to anyone casually looking would suggest that paying by cash would have been a better option, the smart thing to do, this way you wont have to pay the interest. So if your car costs Rs. XX/-, you will end up paying Rs. xx/- and the cars yours. But why do people forget that the worth of money is much more to you today then it will be after 3 years or maybe even 5 years. And What about the earning potential of the money that is lying in your bank.

Lets See how this works out if you pay cash...
  • Cash paid: Rs. 400000/-
  • Car loan interest costs: Rs. 0/-
  • Interest lost on cash (48 months @ 9% interest on FD): Rs. 144000/- ( Maybe even more if you invest in Stocks or some other form of investment like property)
  • Total cost of the car: Rs. 544000/-
Lets Now See if you were to get the car financed

  • Cash paid: Rs. 0/-
  • Car loan interest costs @11%: Rs. 176000/-
  • Interest earned on cash (48 months @ 9% interest on FD): Rs. 144000/- ( Maybe even more if you invest in Stocks or some other form of investment like property)
  • Total cost of the car: Rs. 432000/-
First thing i know everyones asking is that why cash paid is being considered as zero, well i am assuming that cost of the car is Rs. 500000/- And that you have to pay One Lakh additional in each case. Especially 1 lakh as down payment in the last case.

Anyways i guess you are getting my point, but then some people would dispute the above by, that paying cash has some psychological advantages, like not worrying about the constant debt, monthly EMI and the likes. But i guess its more of a point of view.

There is of course a flaw in the above calculation but i really didn't want to mention it earlier but the thing is that the entire amount of Rs. 400000/- should be available for the entire period for earning the interest but then we haven't taken the Compounding of interest either so i guess we should be even.

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1 comment:

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