“When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house”, says Robert Kiyosaki in his iconic personal finance book Rich Dad, Poor Dad. According to him, owning a house can be expensive as it takes money out of your pocket: EMIs, property taxes and repairs, to name a few.

So, how does that compare to buying a car, a depreciating asset, on loan?

Statistics reveal that 77% of the vehicles in India are financed by banks and NBFCs and that the total outstanding vehicle loans, according to RBI, were Rs. 4.38 lakh crores as of July 2022, with a growth of 19.2% year-on-year.  Enticing offers from car sellers, lower interest rates, and easy availability of car loans fuel the tendency of instant gratification to quickly own the ‘dream machine' that, in many ways, is symbolic of reaching a vital social and emotional milestone.

Why buying a car on loan proves expensive?

Let us illustrate this point with an example. For buying a car that costs Rs. 15 lakhs (on-road price), you would have to make a down payment of a minimum of 10% of the price i.e. Rs. 1.50 lakh. Assuming a car loan @7.50% for the balance amount of Rs. 13.50 lakh for the tenure of 5 years would entail the following repayment schedule:

Thus, a Rs 15 lakh car would, in fact, cost you Rs. 17.76 lakh (down payment + processing fees + EMIs) Moreover, it is essential to recognize that you will service a loan amount which will be higher than the value of the car, which tends to depreciate faster going by the insurance norms. Do not forget that while you will continue to use the vehicle, it will remain the bank’s property until the loan is repaid.

The above example sufficiently proves that buying a car on loan is not a financially prudent decision. Instead, using the systematic investment plan route, you should build a dedicated car fund consisting of equity and debt funds.  This approach will ensure that you merely pay for what the car is worth and save you from the trouble of paying EMIs.  More importantly, you will reach an important milestone in life owning your dream car, which is truly yours from day one.