Avoid Car Loan – Lease the Car

In one of my blog, I explained the difference between Productive Asset and Non Productive Asset & I suggested, not to invest in Non Productive Assets…There is one more class of Asset & it’s called Depreciating Assets. Your 4 wheeler i.e. Car falls in this category. The assets in this category neither appreciate nor give any regular returns or helps in savings. The investment in this asset class depreciates over a period of time. On top of it, if u buy any such asset by availing loan then it’s a huge Financial Loss/burden. Always avoid Car Loan and Car should be purchased from own fund sources.

In western countries there is a concept of Car Leasing; it was recently launched in India by Mercedes Benz & also offered by many small time operators in Metro cities…Under this scheme, you don’t buy a car from manufacturer or Lease agency but you lease car for fixed duration e.g. 7 years & pay fixed monthly rent to company for leasing the car…In a nutshell, you are not the owner of car but only hiring the same…Now you must be wondering, how it helps company, Answer is simple company claim/book depreciation @ 15% p.a. in its book so virtually in approx 7 years, company claim full upfront cost as depreciation, simultaneously it earned X Rs rent per month & after 7 years company will sell the car for Y amount therefore rent received per month and amount received after sale are returns/profit on investment. This concept is  currently in nascent stage in India but will definitely be a big hit in future.

Now how customer will benefit from leasing, to understand this lets take 2 scenarios

Scenario A: You bought mid-range car for 5 Lac Rs @ 13% p.a. interest for 4 years & you intend to sell the same after 4 years (90% of cars are being sold after 4 years of use). You need to pay approx EMI of Rs 13500 per month

Scenario B: You leased mid-range car of 5 Lac Rs @ 4k rent per month for 4 years

In Scenario A, for 4 years you will pay EMI and total outflow will be 6.42 Lacs (Principal: 5 Lac & Interest: 1.42 Lac). Now at the time of Sale, you can expect approx 2.5 Lac as Sale value after 4 years depending on city & car condition..Therefore for 4 years, you spent or rather say lost 3.92 Lacs i.e. whooping approx 1 lac per year. If you buy car from your own funds then u can reduce this loss by 1.42 Lac i.e. interest you paid on loan amount. Loss of 3.92 Lac amounts to Rs 8166 per month. In other terms it’s a financial loss per month

In Scenario B, your loss is restricted to only 48k p.a. instead of 1 Lac as in Scenario A

Therefore Car Lease is anytime better option compared to purchasing Car on Loan..If u buy Car from own funds then also Car Leasing is much more profitable scenario for you becoz instead of spending 5 lac upfront, u will pay on monthly basis & you can earn some returns on diminishing 5 Lacs (after adjusting monthly rent), which u would have paid upfront if u would have bought your own car.

The Loan should always be availed for building productive assets rather investing in Non Productive (Gold) or Depreciating Assets (Car)…Although, the mindset in India is to OWN but lets not be emotional while making such decisions rather we should be practical in our approach & save Xtra from where ever its possible.

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