Thinking of taking a car loan? Here is a way for you to offset EMIs

It may not be easy for everyone to buy a car with cash, i.e., by planning for it and saving a sufficient amount over a period. However, the yearning to own a vehicle becomes so deep that one may not wish wait for it for years, but take a car loan and bring it home—the most common way of buying a car. However, when taking a loan, one tends to forget that you pay more than the actual cost of the vehicle because of the interest component along with affordable EMIs over five or seven years.  

Here we explain how one can offset car EMIs by investing in mutual funds. However, in such a case, one should always have a surplus in the bank before beginning to invest in mutual funds and paying monthly EMIs.  

For instance, let's say you bought a car worth Rs 10 lakh and made a down payment of Rs 4 lakh. For the remaining balance of Rs 6 lakh, you took a loan for seven years at a 9 per cent interest rate, and your EMI works out to Rs 9,500 a month. So, the loan amount you need to pay will be approximately Rs 8 lakh, including principal and interest. Hence, you will pay an additional Rs 2 lakh as interest in seven years.   

Now, if you start a systematic investment plan (SIP) of Rs 6,000 (taking annualised growth of 12 per cent) for seven years in mutual funds, you will be able to accumulate Rs 8 lakh, and, hence, you will be able to manage to set off your total loan amount in seven years.   

However, you should be able to manage a total outgo of Rs 15,500 for seven years. When you can do that, you can easily set off your loan amount via mutual fund SIPs.   

Similarly, you can work on several combinations to calculate your overall monthly outgo (loan EMIs + SIPs) to offset all EMIs via mutual fund investments by the end of the loan ending year. For instance, if you plan not to make a down payment and buy a car totally on loan, you can avail of that option, too, if you have a good credit score. However, in such a case, the overall monthly outgo will increase as interest and the SIP amount both will increase simultaneously. So, you must ensure you have a surplus in your bank for a given period.  

Apart from this, you must also understand that mutual fund investments are market-linked and not guaranteed. Hence, you should seek the advice of a financial advisor to achieve your goal.