As you read in my previous posts, I do not think taking a car loan to buy a car is really a good idea. Some people have got back to me saying that, while they principally agreed to buying cars through cash payment, it probably means they would not be able to buy the car which they want to buy.
My first response to it will be that you need to cut your coat according to the cloth that you have.If you do not have money to buy the car you want to possess and cannot hope to save up for it within a reasonable period, then you probably cannot afford it anyway. A slightly risky way will be to invest in equity or hybrid products in the hope you will be able to get better returns in the time period under consideration. For example you may want to buy a car costing 10 lacs after 3 years. The scenarios can play out as below:-
- Let us say you have 2 lacs today and will get about another 2 lacs by trading in your present hatchback after 3 years.
- Assuming a 8 % return in debt products, your current 2 lacs will be 2.5 lacs in 3 years time. You therefore need additional access to 5.5 lacs.
- You will need about 13828 Rs investment every month if it grows at 12 % and the cost of car rises by 5 %.
- In case your investment returns are 8% then the amount you need to invest 16128 Rs every month.
As you will see from here, investment in equity will help you get a car of your desire. However, in a short period like 3 years there is a significant risk of the market returns being poor or in some cases, even negative. A better way will be to simply go by the 3 portfolio strategy, not bother too much about the particular goal, invest as much as you can and withdraw money from the appropriate instrument when the time comes. For instance if the markets are doing really well, sell a few stocks from your portfolio in order to buy the car you wanted.
For people in corporate jobs, the best way will be to get a car given to them by their company as a perquisite. This works out well for the company as they can claim depreciation and also for the Employee as the tax incidence is not high. However, as only a few roles have such perquisites inbuilt , this will not be of use to majority of people. You can then look at the option of leasing a car from your company as part of your CTC. The company will normally not have an issue with it, you save something on taxes and after 3-5 years you can get out of the lease. This is actually a good way of changing your cars every 5 years or so, provided you are in a stable job and plan to be there for a fairly long term.
An easier way, in case your spouse is not working or is in a lower tax bracket will be to buy the car in his/her name and get your company to lease it. Even though the lease rental paid will be taxable in the hand of your spouse, the overall tax impact for the family will be lower. This mode is easier as you can easily shift the lease to your new employer, in case of a change in jobs.
Of course, if you are a self employed person or in business you can show the car as an asset and claim depreciation on it. This will be the easiest way of buying a more expensive car. In this situation too, leasing a car directly from leasing companies will work out well as you can write off the amount paid as an expense.
So, go ahead and plan for your first car if you are not having one now. And, if you do, make a plan as to what your next car will be and when are you going to get it.