Loan or personal funds in car purchase


A car is a depreciating asset and loses value over time. The buyers have two options of financing car purchase—through own funds or through a loan.

If the buyer has sufficient funds and is a debt–oriented kind of a person then he must compare the post-tax returns on his investment options to make a decision. But if the buyer is an equity-oriented kind of person he must be prepared to lose capital and face the repayment of the loan. Whatever is the decision it should be made after due thought.

Buying a car for personal use is undoubtedly one of the top most priorities on everyone’s wish list. And, all of us strive to acquire the “dream wheels� some day. The variety of cars on offer, coupled with easy financing options, makes buying a car no longer a dream but achievable reality. However, there are a few ‘roadblocks’ which need to be tackled before the aspiring car owner can ensure a smooth drive.

The facts that must be taken into consideration before making the all-important car purchase is outlined as under:

CAR—A depreciating asset

A car is a depreciating asset and loses value over time. In fact, once a brand new car is bought and driven out of the showroom, it immediately loses anywhere between 15 to 20% of its value. Ideally speaking a car for personal use is more of a liability than an asset since there are only expenses incurred on it and no income generated from it. Therefore, the intended buyer has to ascertain affordability in meeting an increased set of expenses such as maintenance costs fuel costs etc.

Mode of payment

Once the decision of buying a car is taken the buyers have two options of financing the purchase. If one has sufficient funds at his disposal, he can utilize the same to make an upfront payment for the entire cost of the car or can opt for a car loan.

Buying with your own money:

Today, even a small-sized car such as a Hyundai Santro, Maruti Zen etc costs a few lakh rupees. Cars in the premium and luxury segment (e.g. Honda City, Skoda Octavia etc) cost much more. If you utilize your personal funds to finance the car you wish to buy, you stand to lose out on the prospective returns that you could made on those funds if you would have invested them otherwise.

Opting for a car loan:

Today, banks, finance companies and car dealers are offering to fund one’s dream car. To counter balance the rising interest rates regime, they are packaging the loan with attractive discounts and freebies. These include offering a cash discount, free car insurance etc. When you take these additional features into consideration your effective cost of borrowing reduces by 0.5% to 1%

Recommended Strategy:

The moot question is – whether to use own funds for purchasing the car or should opt for a loan even if the buyers have the money to make the purchases. If the buyer is a debt oriented kind of person, the returns earned on investments may not be more than the cost of the loan. However, if there is a tax benefit on the investment, the investor should consider that while computing investment returns. If the return is higher than the cost of loan, then it is advisable to borrow for buying a car. If not, pay for the car from own funds. Alternately for an equity oriented kind of a person, he may prefer to invest money in the stock markets and borrow to purchase the car. This may have two outcomes –

1. You may profit from the markets as a result of which borrowing would become a good decision.

2. You may lose capital in the markets and then regret having borrowed. Be prepared for both outcomes.

Summing up

The last thing the investor or buyer would like to have from the car is a bumpy ride forever in terms financial burden. Whether the car is purchased by way of a loan or out of own pocket, the buyer should ensure that the same has been done after a thorough analysis and he is getting the best of returns.