Buying a car with full upfront payment versus a bank loan: Which option is better?

Suppose you are planning to buy a car and have enough cash in your bank account. What will you do in this situation? Will you make the full payment at once and take the car home, or go for a loan to repay in small EMIs?

Many car buyers opt for a loan even when they have enough money in their accounts to make the full payment. The primary reason is the belief that it's beneficial to keep their funds available for their needs, while deferring the car payment through smaller EMIs over 5-7 years.

Some car buyers also believe that they can earn more by investing their funds while buying the car with an auto loan. However, this belief can be misleading, as investment returns are not guaranteed.

Let's understand this with some examples:

Suppose the price of the car is ₹20 lakh. And there are two scenarios:

Your net gain in the above scenario would be around ₹17.18 lakh.

Let's see how much it can grow if invested in a mutual SIP generating around 12% annualised returns:

The above calculations show that making the upfront payment can be beneficial in terms of returns. It may also be beneficial in some other ways when compared to buying a car on loan (see the following table).

However, it may not always be feasible for a car buyer to pay the full amount at once. In such a situation, one should make a decision based on his financial situation and requirements.