Should I close my Car loan with 3% penalty ?

POSTED BY nitin1001 ON June 29, 2014 2:10 pm COMMENTS (5)

Dear Friends,

I am having a car loan from HDFC for 2 lakhs Rupees with interest rate of 11.99%.

Loan was started from 2012 with monthly EMI of 4404 and I already paid 26 EMI till date. Around 34 EMI is pending (approx. 149736 INR).

I saved some funds and now thinking about below options to use this money:

1) Close the car loan with around 3% pre-closing penalty.

2) Invest time amount in somewhere and let the loan continue.

Please suggest!!

5 replies on this article “Should I close my Car loan with 3% penalty ?”

  1. nitin1001 says:
    July 6, 2014 at 8:29 pm

    Many thanks Kshitij_Peter for your suggestions and sharing your views.

    I am fully agree with you on your last line.

    Reply
  2. Kshitij_Peter says:
    July 6, 2014 at 8:09 pm

    Sorry I am bit confused
    You have 1.35L with you and you are to pay the 4044 as EMI.

    Option 1: You pay 1.35L and close the loan – end of story.
    The RD is a seperate investment.

    Even if we consider that 4044 in an RD at 9% for 34 months would be: 1.58L approx (=FV(0.09/12,34,4044,0,1))

    Option 2: You DONT close the loan: (And you keep paying the 4044 as EMI)
    Put that 1.35 in FB at 9% pa for 34 months, which gives you: 1.70L approx( ==FV(0.083/12,34,0,135000,1)) or 1.35*(1.007^34) — 8.3% pa to counter the monthly compounding)

    So the difference is around 12K.

    Another calculation, you invest 1.35L somewhere at 8.3% and keep withdrawing the EMI – not sure where you’ll get such an investment option though 🙁

    So you will be left with : 15K (=FV(0.083/12,34,-4044,135000,1))

    But again, as for me the bottom line is mental peace,

    I dont want to get too hassled in the calculations, that I lose my mental peace.
    This is a lesson I have learnt from my life experience – Personally I am good in calculations, but I dont want to get lost in them that I stop enjoying life.

    Reply
  3. nitin1001 says:
    July 5, 2014 at 9:44 am

    Dear Kshitij_Peter,

    Thanks for your reply. So you mean to say it will be a wise decision to continue to loan and invest amount in somewhere else?

    I did some calculation, as mentioned below:

    Let suppose,
    Outstanding: 1,35,000 (with pre-penalty charge)
    Period: 2.8 years

    OPTION#1: Pre-pay car loan!!
    Pay: 1,35,000 in one shot to close car loan
    Invest: 4500 * 34 = 153000 in RD with 8.5% for 2.8 years
    Return: 1,73,000 (without TDS deductions) in 2.8 years

    OPTION#2: Don’t close car loan, rather invest it!!
    Pay: 4500 * 34 = 153000 as a ongoing loan EMI.
    Invest: 1,35,000 in FD with 9% interest for 2.8 years
    Return: 1,75,000 (without TDS deductions) in 2.8 years

    Conclusion: Return of both options is more-less same. Am I missing something?

    Please suggest.

    Thank you.

    Reply
  4. Kshitij_Peter says:
    July 4, 2014 at 6:34 pm

    Hi Nitin,

    If you keep 1.5L in a FD and you’ll get around 1.9 L in 3 years.

    Even if you keep withdrawing monthly EMI from the 1.5 L still you’ll be left with 40K at end of 34 months. Check this using the FV function in excel.

    I think since you are at the middle part of your EMI cycle, you would have paid majority of the interest and now you are paying primarily the principle).

    Reply
  5. nitin1001 says:
    July 1, 2014 at 9:06 pm

    Dear Seniors,

    Requesting you to please share your suggestions on this? Car loan close or make investment?

    Thank you.

    Reply

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