Use idle cash to finance a car buy, avoid that expensive loan

Priya Vishwanthan (name changed) had a high paying job in a media house. Although she had money in her saving account besides bank fixed deposits, she still decided to buy a car by taking a loan. Today, she regrets her decision.

The post-tax return on her fixed deposit is 7 per cent, while she took a car loan at 10 per cent. That means a 3 percentage point loss. "One should use the cash in saving account/fixed deposits for buying a car rather than taking a loan. Also, in today's time of recession, people are losing jobs and therefore one should ask himself if they can pay the big loan instalments on their car, if they lose their job," says Jaydeep Lonihal, director, Wealth Gyan.

What should be the EMI for the car loan? Says Amar Pandit, CEO, My Financial Advisor, "The total debt of a person should not exceed 35 per cent to 40 per cent of his net salary. If the person already has a home loan or any other loan and is planning to get a car loan, then he should balance the loans based on preference or need such that the debt does not exceed 40 per cent of his net salary."

No Tax Benefits: Unlike a home loan, a car loan does not give you any income tax exemptions.

Shorter loan tenure for frequent sellers: If you are in a habit of selling your old car and buying a new car frequently, choose a shorter loan tenure. Remember, you need a no-objection certificate to sell a car. It also pays to buy a model with a better re-sale value.

Choosing a Bank Compare the rate of interest that various banks offer in addition to considering their processing charges. Some Banks calculate the interest rate on a flat basis while some on a reducing balance basis.

Also check the down payment amount and the prepayment penalty. Most banks ask for a down payment of 15 per cent. Pandit recommends a fixed-rate loan because interest rates are on the lower side these days and might firm up in the next couple of years.