Taking a Car Loan: The Real Cost

Car Loans are offered by all major banks in India and as it is secured by the car, the interest
rate offered is lower than that of unsecured loans such as personal loans. However, there are
other costs though small, that add-up to increase the overall costs.

There are costs like document charges, processing fees, and GST on that processing fees and
so on. To give you a sense of how much you will pay, here is the list of Car Loan Interest
Rates and Processing Fees of some leading banks in India:

Buying a Car with Loan: How Much More Are You Spending?
Before you even take a car loan you need to arrange the down payment. Most banks give you
80% to 90% of the car’s on-road price as a loan. This means you need to pay 10% to 20%
from your own pocket at the time of purchasing the car. So if you take a loan for a car with an
on-road price of Rs. 12 lakh, you will have to make a down payment of Rs. 1.2 lakh to Rs.
2.4 lakh.

Now, as we said earlier, the interest on a Car Loan is the primary cost that you incur over and
above the cost of the car itself. The interest amount you will end up paying in total depends
on the loan amount, interest, and loan tenure. Most banks today offer car loans with a tenure
of up to 5 years, however, some lenders offer Car Loan tenure of up to 7 years.

To understand how much more money you end up paying, let’s take the example of a car
whose on-road price is Rs. 12 lakh. You decide to pay 10% as a down payment and take a car
loan for the remaining amount at 8%. So you will pay Rs. 1.2 lakh as an upfront payment
and Rs. 10.8 lakh will be the loan amount. Here is how much extra you will end up paying for
5 and 7-year tenure.
As you can see, over the 5 or 7-year loan tenure, a Car Loan is quite expensive. You end
up paying an extra 20% to 30% of the car value as interest and other charges.

Also notice that opting for the longer tenure substantially increases your interest cost even
though the individual EMI payments seem low. What’s more, unlike a Home Loan or an
Education Loan, there are no tax benefits when you pay off a Car Loan. Now let’s consider
the alternative to taking a car loan.

The psychology of taking a loan and then investing that same amount into mutual
funds is that on one hand where you feel the burden of paying monthly EMIs and additional
interest, on the other hand it is very difficult to digest volatility of the short term in markets on
your lakhs of lumpsum investment.

Also, since mutual funds are very liquid from redemption point of view, you may be tempted to
redeem them in case your portfolio becomes red or in case you have an emergency. This will
negate the benefit of what your original strategy was.

So, in order to benefit from the strategy or loan+investment, you need to be extremely
disciplined and focussed. You need to forget the lumpsum you invested in MFs for the duration
of the loan.