Economies of scale (EMIs vs cash down)

The best way to buy a car is with a cash-down payment. The question is can you afford to do so? Here are some factors to consider

EMI or cash down

There is no end to the discussion about buying a car cash-down or via a finance option. Inflation affects the re-sale value of a car greatly. So, should one buy a car as a long-term investment or as a two-year plan? In the case study here, X buys a car for Rs 5 lakh, on road value in Delhi, and plans to keep it for a period of five years.

Year Depreciation @ 10%
0 Rs. 5 lakh
1 Rs 4.50 lakh
2 Rs 4.05 lakh
Rs 3.65 lakh
4 Rs 3.29 lakh 
Rs 2.97 lakh

In a long-term investment where a buyer would keep the vehicle for more than five years, cash-down is ideal for simple reason that after the stipulated time, the owner still gets a decent amount for the vehicle. And the car would anyway lose out further on re-sale value as depreciation would become higher.

Now, let us consider case II where Y buys a car with cash-down payment of Rs 3 lakh on the same car. At 5 per cent, Y gets the rest of the amount via finance. Here is what the calculation over five years comes to:

Depreciation @ 10% EMI @ 3 % (Rs 5721 approx)
1 Rs 4.50 lakh Rs 43,200
Rs. 4.05 lakh Rs 43,200
Rs 3.65 lakh
Rs 43,200
4 Rs 3.29 lakh
Rs 43,200
5 Rs 2.97 lakh
Rs 43,200
  Total amount on EMIs Rs 2.16 lakh

So, in total, Y ends up paying Rs 3 lakh as down payment and Rs 2.16 lakh over five years, therefore spending Rs 16,000 more. It is quite evident that a car on finance over a period of five years or more is going to cost you more. However, one can sell it on reaching a threshold of its total value (Rs 5 lakh) which would by the third year. One earns Rs 65,000 on the resale value of the vehicle (Rs 3 lakh down payment) while losing out on Rs 16,000 in total after paying all EMIs for year three (Rs 5.16 lakh – total cost incurred by the owner). So, at the end of third year, you end up saving Rs 49,000, but by the fourth year, losses would increase. It is in any case it is advisable to use a car for three years if you plan to buy it on EMIs. The EMI rate that is taken here is hypothetical and has no relation to what the actual rates are.

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