Should I buy a car on a loan?

Would you recommend buying a car on a loan? I have savings worth 50 per cent of the total cost of the car and for the remaining amount, I am planning to take a loan.
- Nidhi

I feel there are two or three situations wherein borrowing money to buy something is justifiable. One is the home loan - because it is a big-ticket purchase. It is a long-term borrowing, costs lower interest rates and provides some tax benefits as well.

So, in that sense, you are buying an asset that will appreciate and you will start consuming it, thereby saving the rent. So, it justifies taking a home loan. The second kind of borrowing, where you do not have a choice, is during an emergency. You do not have money and you must borrow as you cannot do anything.

The other is borrowing money for doing essential things, not necessarily for an emergency. If this car helps you do your job better, then it is an input to doing your job better. So, in that sense, it may enhance your efficiency and lead to a superior career prospect. Otherwise, if it is aspirational spending that you want to buy a car so that you can feel happy and use it some time, then defer it. And if it is a little bit of input, go ahead and have it.

So, the rule is straightforward. You will be buying an asset that will depreciate and you will be incurring interest on that. So, opt for a car loan if the car is an input to something that will help you earn more or do your job better. It is spending and normally, spending should not be backed by any kind of borrowing.

This article was originally published on May 29, 2020.