Pay car loan early or invest instead? Expert shares the numbers that might surprise you

For many, the instinct when taking a car loan is simple: pay it off as quickly as possible to eliminate debt and reduce interest costs. However, financial experts suggest that this may not always be the smartest move, especially for those looking to maximize long-term wealth.

Shashank Sunil Udupa, a registered individual research analyst with SEBI, explains that wealthy individuals often deliberately keep car loans for longer periods. The reason? It’s not about being unable to pay—it’s about putting cash to work elsewhere.

“Rich people invest their money to grow rather than paying off loans immediately,” Udupa said. “A car loan isn’t a burden; it’s a cheap source of capital. The money you don’t tie up in a depreciating asset like a car can generate higher returns if invested wisely.”

Consider this: a car worth ₹20 lakh loses 40–50% of its value in just five years. Paying cash upfront locks a significant sum into a rapidly depreciating asset. By opting for a loan with a reasonable interest rate—say 9% over five years—the buyer can make a smaller down payment and gradually repay the EMI. Meanwhile, the remaining funds can be invested in fixed deposits, bonds, or equity instruments, potentially yielding 9–11% over the same period.

“Now have you noticed that in the market right now suddenly a lot of EVs are coming? That’s because most people are buying EVs on their company accounts. The logic is simple: I pay 20% down payment for the car, the rest is financed through a loan. Depreciation on EVs is about 40%. That means if I buy a car worth ₹40 lakh, I can claim ₹16 lakh as depreciation in the first year, while my down payment is just ₹8 lakh. After five years, companies typically sell these EVs at very low prices and buy new ones. Only high-income individuals seeking legal tax efficiency use this strategy,” he explained.

Udupa further illustrated the math: “Let’s do a simple numbers game. If you buy a car at ₹20 lakh in cash, after five years, it might be worth ₹10 lakh. Your cash is effectively halved. Option B: take a loan, pay about ₹24 lakh over five years including interest. Sounds costly, right? But here’s the twist: the ₹15 lakh not used to buy the car upfront can be invested in bonds or FDs at 7–9%. After five years, that grows to around ₹21 lakh. If you diversify—50% in bonds, 50% in equity—the same ₹15 lakh could grow to ₹25 lakh. So, while you pay slightly more in interest, your investments quietly grow, and you maintain liquidity for emergencies or opportunities. This is exactly how the wealthy think.”

The key takeaway is opportunity cost. Rushing to pay off a car loan may save a little on interest but it sacrifices the potential gains from investments and liquidity. For the wealthy, cash is power—they prefer flexibility and growth over the peace of being entirely debt-free.

For middle-class families, the appeal of being “debt-free” is understandable. But experts argue that the real focus should be on cash flow and long-term wealth creation. If EMIs are manageable and money can grow elsewhere, stretching a car loan can be a strategic financial decision rather than a liability.