Car Loan vs Cash Payment: Which is the Smarter Choice?
When buying a car, many people wonder whether it’s better to pay the full amount in cash or take a loan. The common belief is that cash payment eliminates the hassle of EMIs and interest. However, with the right strategy, taking a loan can actually be more beneficial in the long run.
What Does the Example Say?
Wealth manager Vijay Maheshwari shared a case study on LinkedIn. Let’s assume you have ₹20 lakh in cash and want to buy a car worth ₹20 lakh. You now have two options: either pay the full amount upfront or make a down payment and take a car loan.
If You Pay in Cash
By choosing the first option, you pay ₹20 lakh in one go and buy the car outright. While this gives you complete ownership without EMIs or interest, your bank account balance is wiped out.
Is a Car Loan More Beneficial?
In the second option, you make a down payment of ₹5 lakh and take a loan of ₹15 lakh at 9% interest for 5 years.
This leaves you with ₹15 lakh in hand, which you can invest in a safe or moderate-risk mutual fund averaging an 11% annual return.
The Result
-
On the loan: You pay around ₹3.6 lakh as interest over 5 years, making the total car cost about ₹23.6 lakh.
-
On the investment: ₹15 lakh invested at 11% annual return grows to about ₹25.8 lakh in 5 years.
This means you gain ₹10.8 lakh from the investment. Even after deducting the ₹3.6 lakh interest paid on the loan, your net gain is around ₹7.2 lakh.
Why is This Beneficial?
The investment returns not only cover the cost of the loan but also generate additional wealth. This demonstrates the true power of opportunity cost and compounding.
Experts explain that while loan interest reduces over time as you repay the principal, investments grow through compounding — earning returns on both the principal and the accumulated gains.
Disclaimer
This information is for educational purposes only. Market investments are subject to risks. Always consult a financial advisor before making investment decisions.
0 Comments