Purchasing a car is one of the most considerable expenses an individual makes after buying a home. For many, purchasing a vehicle is a short-term goal, and you can opt for a car loan to meet the same. However, if you plan to buy a car five years later, you can start saving today. In this blog, we help you understand whether you should take a car loan or save for your car using mutual funds.
1. Car loans come with additional costs
All major banks in India offer car loans. Since it is secured by the car, the rate of interest is lesser than personal loans. But, other costs still exist that add up to increase the overall costs. These include processing fees, document charges, and GST.
2. You pay much more with a car loan
Many banks offer 80% to 90% of the car’s price as a loan. Thus, to buy a car, you need to pay 10% to 20% from your savings. For example, if your car’s on-road price is Rs. 15 lakhs, you need to pay Rs. 1.5 lakh or Rs. 3 lakh as a down payment.
Interest is one of the primary costs you pay over and above the principal amount of the car loan. The interest amount is calculated based on the loan amount, interest rate, and loan tenure.
Let us understand this in more detail with the following example.
For your car worth Rs. 15 lakhs, you paid 10% (Rs. 1.5 lakh) as a down payment. The loan amount will be Rs. 13.5 lakh. Suppose the bank charges 8% as the interest rate and the tenure is 5 years; your monthly EMI is Rs. 27,373. Your total interest payout equals close to Rs. 2.92 lakh.
So, a car loan is quite expensive. You pay a lot more than the car’s value as interest and other charges.
3. Your car is a depreciating asset
The value of your car is depreciating. Instead of paying a particular amount as EMI every year, you can choose to invest in monthly SIP and earn returns, which can help you earn more than the principal loan amount at the end of five years.
4. Car loans do not carry any tax benefits
Car loans are categorized as bad loans. You cannot avail of any tax benefits on the same, unlike home loans and education loans. Thus, these are expensive loans.
5. Mutual funds offer superior returns
Equity mutual funds are great for achieving long-term financial goals, such as children’s education, retirement, etc. But, if you are interested in goal based investing and have five years at hand to buy your new vehicle, hybrid or debt funds are ideal for you.
When you have to choose between a car loan or mutual funds, the latter is always better. The Tata Capital Moneyfy App is an ideal choice for new investors. It makes you investment-ready within minutes to make the most of the goal-based investment options.