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Planning to buy a new car in India. Options I have are as follows:

  • Company leased car
  • Direct Auto Loan from finance company
  • Full one-shot payment from savings

From all the articles I've read today, full one-shot payment from savings (which I think I can afford) sounds like the best approach since car is a depreciating asset.

Is my understanding correct? Or should I still go for a partial finance via company leased car or direct auto loan? If I should, will I actually benefit from the tax-savings angle?

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  • 2
    Full payment will always put you in a better position than a financed situation. For the best answer, please include more details on the company leased car contract. What are your terms with the company car? Are there any restrictions on use?
    – jkuz
    Mar 22, 2016 at 13:29
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    I take it this is NOT an interest-free loan as some auto dealers in the US sometimes have? Anytime you can borrow money at less than the risk-free interest rate, you should.
    – user1731
    Mar 22, 2016 at 14:18
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    Buy an inexpensive used car. Never buy a new car. Total waste of money.
    – Fattie
    Jul 14, 2016 at 13:48
  • I wouldn't qualify a car as a depreciating asset it is a tool ;)
    – Ross
    Aug 18, 2016 at 19:21

6 Answers 6

3

Full payment is always better than auto-loan if you are prudent with finances. I.E if you take a loan, you are factoring the EMI hence your savings will remain as is. However if you manage well, you can buy the car with cash and at the same time put aside the notional EMI as savings and investments. The other factor to consider is what return your cash is giving. If this more than auto-loan interest rate post taxes, you should opt for loan. For example if auto-loan is 10% and you are getting a return of 15% after taxes on investment then loan is better.

Company Car lease depends on terms. More often you get break on taxes on the EMI component. But you have to buy at the end of lease period and re-register the car in your name, so there is additional cost. Some companies give lease at very favourable rates. Plus if you leave the job lease has to be broken and it becomes more expensive.

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Without knowing the terms of the company leased car, it's hard to know if that would be preferable to purchasing a car yourself. So I'll concentrate on the two purchase options - getting a loan or paying in full from savings.

If the goal is simply to minimize the amount paid for this car, then paying the full cost up-front is best, because it avoids the financing and interest charges associated with a loan.

However, the money you would pay for this car would come out of somewhere (your savings). If your savings were in an investment earning a risk-adjusted return rate of, say, 5% APY and the loan cost 1% APY, you'd have more money in the long run by keeping as much money in your savings as possible, and paying the loan as slowly as possible, because the return rate on your savings is higher.

Those numbers are theoretical, of course. You have to make a decision based on your expectation of the performance of your investments, and on the cost of the loan. But depending on your risk tolerance and the loan terms available to you, a loan may well make sense. This is especially true when loans costs are subsidized by manufacturers, who often offer favorable financing on new cars to drive demand. But even bank loans on cars can be pretty inexpensive because the car is a form of collateral with predictable future value. And finally, you should consider tax treatment -- not usually a consideration in purchases of cars by consumers in the US, but can vary due to business use and certainly may be different in India.

See also: How smart is it to really be 100% debt free?

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What percentage of your savings is the full cost of the car? If it's a significant chunk, then I'd finance some of the cost of the car in order to maintain liquidity.

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There needs to be more numbers with your choices, without those any answer is purely speculation.

Assuming that India is much like the US, you are almost always better to go with a company leased car. That is if you are not responsible for the lease if your employment ends with the company.

Here in the US companies typically reimburse, so tax free, their employees for about 50 cents per mile, or about 31 cents per kilometer. This barely covers the gas and insurance and falls way short when one includes deprecation and maintenance. So it is better to have the company to pick up all those costs.

Borrowing money on a car is just plain dumb no matter what the interest rate. So I would stick with choice number 1 or 3 depending on the arrangement for the company leased car.

The next question becomes how much you should spend for a car? I would say enough to keep you happy and safe, but not much more than that until you are wealthy.

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  • What are US companies reimbursing? Are you speaking of car used for work required travel? If so then I agree and company leased car is the way to go. Followed by a personal lease (unreimbursed expenses for this are tax deductible, in part, IIRC.) Then there's buying a car outright and deducting as much as you can of unreimbursed expenses. Finally financing a car and deducting. I also agree that financing a depreciating asset is bad financially.
    – Xalorous
    Aug 18, 2016 at 23:06
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There’s no single answer. Find out the amount of taxes, and the interest rate you would pay for a car loan. Compare the final charges. It depends on the state and your lender, so the question itself is a bit abstract. Or you’re asking whether it is possible in principle? Then YES, there are cases, when the loan is more profitable. Just explore your own case and compare different lenders.

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Your understanding is correct in that purchasing a car outright with your savings is generally the most cost-effective option, particularly for a depreciating asset like a car. This is due to the fact that if you take out a lease or loan, you will have to pay interest and fees, which can add up to a significant amount over the life of the loan or lease. Furthermore, if you use your savings to purchase the car, you will own it outright and will not have to worry about monthly payments or the possibility of defaulting on a loan or lease.

On the other hand, leasing or financing a car can be a good option for those who want to save money and spread out the cost of the car over time. If you take out a lease or loan, you can still benefit from the tax-saving aspect if you are eligible for interest deductions. In India, you may be able to claim tax deductions on car loan interest, but the exact rules and eligibility criteria vary depending on your individual circumstances.

If you're thinking about leasing or financing a car, I'd suggest researching the various options available to you, including the interest rates, fees, and terms associated with each. You should also consider your overall financial situation, including your income, expenses, and savings, to determine whether you can afford the monthly payments and whether it makes sense to incur additional debt. The decision to lease, finance, or pay cash for a car ultimately comes down to your personal preferences, financial goals, and circumstances.

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