How to own your dream car!

By BankBazaar | November 20, 2014

Car

Owning a car is a dream for many people. Let us take the case of Rahul and Priya, who have been married for 2 years now. Rahul runs his own business while Priya is employed with a private company. Rahul and Priya plan to buy a car as they intend to expand their family the coming year. They have researched the market well and have shortlisted a particular model as the right one for their family. Rahul and Priya are faced with three options to buy and finance their new car – buy a new car with a car loan, buy a used car with a car loan or opt for a car lease. Here is an analysis of the three options:

Buy a new car with a car loan:

Buying a new car will logically cost more, as the ex-showroom price is usually considered. Car loans are available upto 85%-90% of the value of the car. The remaining 15% will need to be contributed by the purchaser in the form of a down payment. Interest rates on the car loan vary between 11.5% and 17%, depending on the bank. The borrower will also need to pay processing fees for the loan. Car loans are offered for a period ranging from 1 year to 7 years. The borrower will need to submit the necessary documents and also provide post dated cheques / standing instruction mandate for the Equated Monthly Instalment (EMI).

Different terms such as tenure of the loan, interest rate, processing fees, prepayment terms etc vary from one bank to another. Opting for purchase of a new car means the purchaser can claim depreciation benefits @ 15% and bring down his taxable income to that extent.

Buy a used car with a car loan:

A used car is available at a much cheaper rate than a new car, as car is a depreciating asset. However, one needs to pay attention to critical details before purchasing a used car, as the risk is high. The age of the car and the distance travelled as important aspects to be checked. Taking professional help to check the intricate parts is recommended to ascertain the actual value of the car.

It is also important to check if the legal papers are in order for a used car. Banks give car loans for used cars. As the value of the car itself will be lower than a new car, the total cash outflow will be lower in this option. However, a car loan for used car will carry a comparatively higher interest rate than that for a new car. Also, many banks impose a limit on the tenure of the loan or the amount of loan if the funding is for a used car.

Car lease:

A car lease is an arrangement where the car is used for certain duration by the lessee, in exchange of which he makes a monthly fixed payment known as the lease rental. This monthly payment is like the EMI paid on a car loan. A car lease can either be an operating lease or finance lease. In case of an operating lease, the car is used by the lessee during the term of the lease and at the end of the term, it is taken back by the lessor. The lessee can also choose to purchase the car at the prevailing market price. In case of a finance lease, the car is funded during the term of the lease and lessee becomes the owner at the end of this term.

The lease rentals vary accordingly. Irrespective of the form of lease, there are some benefits offered by a car lease. The first advantage is that there is flexibility to change the car at the end of the lease term, as there is no need to think about the resale value of the car. At the end of the lease term, the lessee can either change the car or purchase it at the prevailing market price, thus giving flexibility. Secondly, lease rental payments enjoy a tax benefit in the form of deduction from income, unlike a loan EMI payment. This helps in lowering taxable income for businessmen considerably. Next, there is no down payment needed in a lease. Leasing companies also offer ancillary services such as accident repairs, maintenance and insurance services. However, there are some drawbacks in a car lease like a limitation of mileage in some leases and restrictions on carrying out changes in the car.

Rahul and Priya considered the options above and plan to opt for a car lease in view of the advantages. This option would allow them to get a new car and also give them the flexibility to change their car at a lower cost after the lease period. Moreover, as Rahul was running his own business, it would be easy to avail a car lease and also give higher tax benefits. The following is a comparative table of the three options:

Features Buy new car with loan Buy used car with loan Car Lease
Monthly payment EMI EMI Lease rental
Down payment Yes Yes No
Ownership of car Yes Yes No
Tax Benefits Depreciation @ 15% Depreciation @ 15% Deduction from income (depends on tax slab)
Flexibility to change cars Lower Lower Higher
Advantages Use of new car possible, car loan available for all types of borrowers Lower cash outflow as cost of used car is much lower, car loan available for all types of borrowers No down payment, higher flexibility and higher tax benefits, use of new car possible
Drawbacks Higher paper work for the loan, Lower tax benefit in the form of depreciation, down payment required Paper work and car condition to be checked with extra care, Lower tax benefit in the form of depreciation, Higher interest cost, down payment required Inability to carry out changes in car, limitation on mileage in some cases, car lease option usually available only for self employed individuals and companies

 

YOU MAY ALSO WANT TO: Calculate your own EMI on that car loan – Car Loan EMI Calculator

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