Are you confused if you should take a loan from a bank to buy a car or pay the amount in full at once? Read here to find out, which one would be the cheaper way.
Cars are one of the most involving forms of machinery. They can fill the user with joy and can be used to experience some adrenaline rush as well. For the very reasons, enthusiasts want to buy more and more cars. Also, those who are not a part of the automotive culture, desire to get a car home as it cuts off out the hassle of travelling via public transport. Since buying a car holds an aspirational value in India, people often plan and save for years before buying one. However, while buying a car, there’s one question that pops up in everyone’s mind – Should we get it financed or pay the amount in full? To find out the answer, we came across a video from the YouTube channel of MyCarHelpline.
In the video, the host solves this mystery of how you should plan to pay for your new vehicle. According to him, it is a better deal to get the car financed from a bank and pay the amount in small EMIs. He explains with the help of an example where the principal amount of the loan is Rs. 3.00 lakh, tenure of the loan is 60 months/5 years, and the annual rate of interest is 7.5 per cent. In such a case, the effective flat rate of interest comes up as 4.04 per cent. In case you are wondering, how? This is because the interest amount is calculated on the reducing balance of the principal amount.
Now imagine you end up making a fixed deposit for the full amount - Rs. 3.00 lakh for five years at a rate of interest of 5.50 per cent. It would sum to Rs. 3.94 lakh after five years. To simplify these things a little more, let’s compare the interest paid on the loaned amount and interest received from the fixed deposit. The interest paid is Rs. 60,060, while the interest received is Rs. 94,220. In simple words, you save Rs. 34,160 on the purchase, by opting for a loan. This was possible because the interest in a fixed deposit is calculated via compounding method. Moreover, if you are planning to buy a car via a loan now, with a plan of foreclosure, then opting for a shorter tenure is the right move to save on some hard-earned money.