Never pay interest on car loan again.

Wise people only buy a car when they have the money to afford it in full, not the first few EMIs.

But they never pay it all upfront.

Buying a car, or any depreciating asset, is a double whammy.

• Firstly, the value drops as it comes out of the showroom.
• Second, the interest component of EMI is very high in the initial months of the purchase.

Here's an illustration.

The interest component in the EMI is the highest during the first year. You pay almost 50% of the interest in the first couple of years alone!

But when you have the money, it makes no sense to pay that much interest out of your pocket, right?

Yes, you can always prepay.

But bankers are clever. They will either restrict on when and how much you can prepay.

Or

They will tweak your EMI in their favor. After all, the interest you pay is income to them. They will fight hard to keep it.

Since fighting with the bank is not an option, here’s what you can do.

You can set up a Systematic Withdrawal Plan ( SWP) in your investments allowing you to withdraw a certain amount every month.

In our case, this will be equal to the EMI on the car loan.

Let's see how the math plays out.

Instead of paying 10L for the car upfront, we invest the money in an instrument that yields more than 8.5% ( the interest on the car loan ). These could be mutual funds, index funds, corporate bonds, etc.

Assuming 12%, which is the average return on the index, you will cover all of your EMIs for 7 years and still have Rs 2,00,000 left after the tenure!

Let's say you don't want to invest in the stock market and prefer FDs or government bonds instead, which provide a minimum of 7% return. The magic happens here as well.

Instead of paying Rs3,20,000 in interest on your loan, you will only have to pay around Rs80,000.

But by investing just Rs50,000 more initially, you can bring this amount down to 0.

And this is one of the reasons why Warren Buffet calls compounding the 8th wonder of the world.

DM me if you have any questions about it, always happy to help.

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