Car Loan: Whenever someone goes to buy a new car, the biggest question before them is whether to pay the entire price in cash or take a loan and pay through EMI. Usually, people believe that by making a cash payment, there is no burden of interest and installments. But experts believe that if done strategically, taking a car loan can prove to be more beneficial in the long run.
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Effect of making a cash payment
Suppose you have Rs 20 lakh and you want to buy a car of the same price. If you buy the car by paying cash, then the car will come directly to your house, and there will be no worry about interest. But in this option, your entire savings are lost, and the bank balance becomes empty.
Car loan option
If you choose a loan instead of cash, then, for example, you can take a car loan of Rs 15 lakh by making a down payment of Rs 5 lakh. If the interest rate of the loan is kept at 9% and the period is 5 years, then during this period, you will have to pay a total interest of Rs 3.6 lakh. That is, the actual price of the car will be around Rs 23.6 lakh.
How to get profit from an investment
Now the real game changes here. If the remaining Rs 15 lakh is invested in a safe or medium-risk mutual fund, which is giving an average annual return of 11%, then after 5 years, this amount can reach around Rs 25.8 lakh. This simply means that you will get a profit of about Rs 10.8 lakh.
Calculation of net gain
You paid Rs 3.6 lakh extra interest on the car loan. But the investment gave a profit of Rs 10.8 lakh. The result is that even after deducting the interest, you are left with a net gain of Rs 7.2 lakh. That is, despite taking a car loan, you remain in profit.
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Why the combination of a car loan and investment is right
According to financial experts, along with paying the installment of the car loan, the principal also gradually decreases, due to which the burden of interest reduces year after year. On the other hand, investments keep growing due to compounding. The magic of compounding is that investments earn interest not only on the principal but also on the interest already earned. This is the reason why investments give better returns despite the cost of the loan.