As a child, you probably wanted to do many things when you grew up: become an astronaut or a detective like Sherlock Holmes, go underwater in a submarine, play cricket for India and own your dream car. However, as you grew, your perspective in life changed and your dreams took on new shapes. But despite all the ‘growing up’, one thing remained constant: your dream car. You wanted to own it then, and you want to own it now. Instead of taking a loan to make your dream come true, how about investing towards it?
Buying a car through loan
Most people take out an auto loan to purchase a car. This seems like a simple solution but you need to think of different aspects such as:
- How much money do I have to put down as down payment?
- How much money should I take as the loan amount?
- What is the rate of interest I have to pay?
After you decide on the answers, you apply for a loan from a bank or a lending company. Once your loan is approved and you get the car, you have to start paying EMIs. This can result in a significant outgo from your monthly salary.
This is why many experts don’t encourage auto loans. It is because, on a fundamental level, an auto loan does not create an asset that appreciates over time. In fact, the value of a car depreciates as years go by. And by the time you finish paying the loan, it may be time to purchase a new car.
Let’s take an example to illustrate how much you have to spend to purchase a car
Assume you wish to buy a car that costs you Rs. 10 lakhs. You make a down payment of Rs. 3 lakhs and take a loan amount of Rs. 7 lakhs. With the tenure of 6 years and 11% rate of interest on the loan, you would have to pay Rs. 12,000 as EMI each month throughout the loan.
Going the investment route
It is a great feeling to own and drive your dream car each day. But as mentioned above, a car is a depreciating asset that can result in a cash outgo from your pocket. But what if you could offset this outgo through investments.
This is how it is possible
As you pay the EMIs, you can simultaneously begin investing in mutual funds through a Systematic Investment Plan [SIP]. For example, let’s assume you invest Rs. 6,500 each month in a balanced mutual fund that offers 15% annual rate of return. By the end of 6 years, you would have earned an amount equal to Rs. 7.6 lakh. This is more than what you paid for as EMI for your car loan.
Therefore, an overall monthly outgo of Rs. 18,500 [12,000 + 6,500] over the tenure of the car loan can prevent a dent in your savings.
Investment planning
Another way is to bypass the auto loan route completely. Buying a car is a crucial decision in your life. It is something that you plan and think about carefully. So, if you are planning to buy your dream car, say, in another 5 years’ time, it is a good idea to start investing for it right away. You can invest regularly in equity funds or index funds through SIP and create a substantial lump sum right in time to buy the car you want.
There are many other benefits of investing in Mutual Funds such as good returns, tax benefits, investment discipline and easy diversification.
Conclusion
Taking a loan to purchase a car is common but investing for a car is easier and more cost effective. By planning carefully, you can invest a lot more in SIPs because you don’t have to pay monthly EMIs anymore. And when you finally get the car of your dreams, think of it as a gift by you to you.