Advantages of buying a car via full down payment over EMIs

In an interview to CNBC-TV18, personal finance expert, Pankaj Mathpal of Optima Money Managers outlined the advantages of buying a car via down payment than monthly installments.

Below is the verbatim transcript of Mathpal’s interview with CNBC-TV18. Q: Is it better to buy a car on equated monthly installments (EMI) versus paying full down payment? What happens when an investor misses few EMIs? A: Car is a depreciable asset, so as far as possible one should buy with a down payment only. I will give an example, if one buys a car worth Rs 10 lakh and loan is for next five years and the rate of interest is 12 percent, one will pay around Rs 13.30 lakh for Rs 10 lakh car, including principal and interest. If one wants to sell that car after five years then I do not think he will get more than Rs 5 lakh. However, for Rs 10 lakh one will be paying Rs 13.35 whereas that value is decreasing with time. Are guaranteed savings insurance plans better than PPF? So, if one has money to pay, it is always good to buy with down payment only. If one cannot afford to buy a big car then better buy small car but as far as possible try to avoid taking loan for the car. When one buy a house it appreciates with time, so there is no harm even in going with interest with loan. However, for car sort of things, it is always advisable to go with full down payment as far as possible. Secondly, when one miss some EMIs and has opt for electronic clearing system (ECS) and if due to insufficient fund or some other reason the money could not be debited from the bank account, in next month whatever the due amount is that will go but the amount, which is pending and if it is not paid then the bank will remind for that and even though if it is not paid then it will keep on increasing with the interest. So, after the term of loan is over and when one apply for No Objection Certificate (NOC), at that time the bank will ask that amount along with interest. Also Read: Seeking both Large & Mid cap exposure? Opt UTI Equity Fund If these EMIs are missed in the first year itself and loan is for five year terms then one will not be able to imagine how much additional interest he will have to pay on that? So, as soon as one realizes that some EMIs are missed then one should pay that. That is better. _PAGEBREAK_ Q: How are insurance claims settled when a car is hypothecated to the bank? What are the consequences if someone forgets to clear the hypothecation after full repayment of the loan? A: When the car is hypothecated it means whenever claim arises, insurance company will ask for NOC from the bank and in case there is a total damage or car is stolen, in such case that insurance claim will be settled in favour of bank, not to the insured person. So, during the period when the loan is overdue that time it is okay, but once the loan is fully repaid after this one should remove the hypothecation. So, for that in the respective ROC where the car is registered with bank’s NOC, along with Form 35 of ROC has to be submitted in ROC for removing that hypothecation. ROC will endorse on registration paper that that hypothecation is cancelled. Along with that one has to submit endorsement of ROC in the insurance company. Otherwise what happens, if one has paid loan, but even then after that if any claim arises that insurance company will either ask for NOC or pay the money to the bank. So, those formalities should be completed as soon as loan is fully repaid. Caller Q: Can I invest Rs 1,500 per month towards retirement and wants to know how to go about it? A: Purpose of retirement planning is to accumulate sufficient corpus. It is not necessary that you invest in pension plan or the scheme which is named as retirement solution or something like that. The objective is that you should have sufficient corpus, so that after retirement you can have regular cash flow, which should last your lifetime. You are only 24-year-old; you can definitely increase the amount with time. I will recommend two things either you invest in mutual funds through Systematic Investment Plan (SIP) route. You can invest Rs 1,500 per month and later as salary increases you can increase that amount or second, you invest in National Pension System (NPS). In NPS it is a balanced scheme so you can open Permanent Retirement Account in any bank who offers this NPS or post office, otherwise for mutual fund I can suggest two schemes, one is HDFC Prudence Fund, which is a balanced fund, so he will have his allocation in equity and debt or otherwise Edelweiss Absolute Return Fund that is another scheme, which is also hybrid scheme. So, you have two choices either mutual funds through SIP route or NPS.