How many of us have gone the full down-payment route. What are the IT implications of doing so?
BHPian thoma recently shared this with other enthusiasts.
How many of us have gone the full down-payment route. What are the IT implications of doing so? Would like to know the percentage of people opting for a loan just for the sake of avoiding any IT questions.
Here’s what BHPian SoumenD had to say on the matter:
I couldn’t buy without a loan. And that was a mistake which I realized later.
Being a salaried person with TDS, IT department issues is out of question for me. Due to the typical itch of owning a new car (older one was 8+ year old and manual) & lack of enough funds, I went with a 5-year loan in early 2019. But thanks to the new found sanity towards financial discipline (a few threads on this forum helped as well), I realized how much money I end up paying the bank as interest uselessly, which could have been easily avoided had I been a little more patient. So started making part-payments every quarter & closed the loan in 1.5 years flat. Had made sure I took the SBI loan which had no part-payment/pre-closure charges. At the end, I had to pay some Rs. 600 as closure charges. Its a relief to be debt-free.
Henceforth will never buy an automobile on loan, be it a bike or a car.
Car loan makes sense for people if you are going for car lease (from office) or buying it for business. In that case, you get good tax benefit. But for personal use where you dont have those two scenarios, I feel its best to go without á loan. Of course, if its an urgent need and you don’t have enough funds, going for a loan is unavoidable, but should be the last option.
Here’s what BHPian hridaygandhi had to say on the matter
There are two things (financially) that you need to look at while buying a car:
1. Rate of interest vs opportunity cost: With dwindling interest rates, you have to see if you can generate more returns than the car loan interest rate being offered to you.
Scenario 1: Suppose you are the risk-averse type and are investing only via FDs or debt funds and generating returns around 5-6% (post tax) and the car loan interest you are getting is around 7.5% (numbers are arbitrary), it will make sense to make the full payment as you would otherwise pay 7.5% when the returns you are getting are 5-6%.
Scenario 2: In case you are investing in assets which give a higher rate of return (equity, although more risky) and are getting around 10%, it will make sense to take the loan and only make the down payment and fund the balance via a loan as you are getting money at 7.5% but your return on investments are generating 10%.
2. IT angle: If you are a salaried employee, the interest you pay on the loan will not get deducted from your gross income, and you will be facing the full brunt of the interest outlay of 7.5%. However, if you are self-employed who falls under the 30% income tax bracket, and are purchasing the car under business expense, you get to claim the interest as business expense, bringing down your taxable income and effective interest rate to 5.25% (30% deducted from 7.5%). In this case, it may be wiser to take a loan instead.
- Depreciation benefit is not considered here as it will remain the same irrespective of how you pay for the car.
- It may aid your CIBIL score to have a loan on your books and make timely payments, helping you when you want to take another loan in the future, with respect to home or business etc.
- While private banks have fixed EMIs, nationalised banks let you make repayments as per your convenience and charge interest on the outstanding balance.
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