Should I pay an EMI or start a SIP to buy a car?

I want to purchase a new Alto K10. I have two options. One, go for a car loan and pay an EMI. Two, instead of paying the EMI, I can start a Systematic Investment Plan (SIP) with the same amount. Later, redeem the investment to buy a car. Which is better?
- Gaurav Pandit

Auto loans and personal loans are considered bad loans. This is because they really don't create an asset that will appreciate in value. In fact, the value of assets financed by these loans invariably depreciates. So, it is always a better idea to save and invest to buy such assets. For example, if you are planning to buy a car in five to six years, you should start investing in a diversified equity scheme through a monthly Systematic Investment Plan (SIP) to build a fund to buy the car.

However, most decisions are not made on the financial angle alone. There are many variable factors that needs to be examined. For example, some individuals may be spending too much money on travelling and a car may help them to drastically cut down their spending. Also, the city may not have a good public transport system. You should consider all these factors before taking a final decision. The rule to follow is: if you can wait, you must save and invest to buy it.

This article was originally published on December 16, 2015.