Planning to buy a big car by selling your old car? Thinking of car loan?
Here is one better alternative. There is an easier way out to avoid loans and still buy a bigger car.
By investing in SIP for the next car, you can not only avoid recurring EMIs but also becomes the owner of the car from the very first day.
Let us assume that you keep your current car for seven years. The next car, which is bigger and better, will be bought after seven years. Assuming if you save Rs 200 a day for the next car, you will save up Rs 6,000 per month. Invest this small sum of money in an equity mutual via the SIP route and see the magic of compounding happen. The best-performing mutual funds and there are a lot of them, have given modest returns in the last seven years. Even assuming that your Rs 6000-a-month SIP gains a modest 12% a year (which is not ambitious), at the end of seven years you’ll create a corpus of 8 lakh on a total investment of Rs 5 lakh.
At the end of seven years, when you have – Rs 8 lakh as corpus from the Rs 6000/month Mutual Fund SIP, it is equivalent to a zero-EMI loan that you earned! By selling off your first car, you can get anywhere between Rs 2-4 lakh depending on the model. So, putting all together you will have a neat sum of Rs 10-12 lakh to buy a bigger car.
But unfortunately, most of us do not plan goal-based mutual fund SIPs.
Now, let’s study the loan option –
Assuming you take a loan of Rs 8 lakh to buy the next car at around 8.9% interest rate. The EMI for a Rs 8 lakh car loan comes to Rs 12,831 taken for a 7-year loan tenure, which is close to more than 2 times the SIP instalment of Rs 6000 that he could have invested for 7 years. At the end of the loan tenure, you would have paid the principal of Rs 8 lakh and Rs 2.77 lakh as interest. So, not only do you end up paying 2 times the SIP amount as loan EMI, you also pay 26% extra as interest on the loan amount!
This case shows that a SIP is an easier and cost-effective way to fund a bigger car.
Mutual funds SIPs are an excellent financial planning tool that helps to create wealth, by investing small sums of money every month. When you do this over a period of time, you reduce dependence on loans and can buy an asset like a bigger car with your own money at your own convenience.
Click here to start investing for your dream car now or email us on support@NiveshMitr.com for an expert to assist you.