Car Loan or Cash: Which Is Cheaper? A ₹10 Lakh Car Worked Out

For a lot of families, the car money is already there. It's ₹8–10 lakh sitting in two or three FDs, renewed every year more out of habit than any plan. So once the car is decided, the real argument at home is about those FDs. Break them and pay in full? Or leave them alone, take a loan, and let the deposits keep earning?

Breaking an FD feels like going backwards. It took years to build, and a loan lets the balance stay where it is. But that feeling skips two numbers: what the loan costs, and what the FD actually earns once tax is taken out. Put those side by side, then think about how much you need left in the bank and how fast the car loses value, and the answer mostly makes itself. We'll work it through on a ₹10 lakh car.

Breaking the FD vs keeping it: what you're really comparing

Paying cash isn't free. You give up whatever that money would have earned, which is the opportunity cost. Take a loan and you keep the savings and their income, but pay interest.

So the comparison is simple on paper. If your savings earn more after tax than the loan charges, a loan can make sense. If they earn less, paying cash is cheaper. For most families the savings sit in FDs, and that is where the maths gets one-sided, as we'll see.

By "cash" we mean paying from your own savings by bank transfer or cheque, not carrying notes to the showroom. Income-tax rules (the old section 269ST) don't let a seller accept ₹2 lakh or more in notes for one deal anyway.

What a car loan costs right now

Car loans from big banks start at around 8.4% and go to about 9.5% for buyers with a decent credit score. SBI's new-car loan, for example, is 8.40% to 9.35% as per its rate page, priced by your credit score, and the rate stays fixed for the whole loan. Dealer-arranged loans through NBFCs are often higher, so get your own bank's quote before you sit with the dealer's finance person. Also watch for insurance and accessories rolled into the loan amount. They earn interest for the lender too. We'll use 9% for the examples.

Say the car costs ₹10 lakh on-road and you borrow ₹8 lakh (banks usually lend 80–90% of the price). Here is what that loan costs at 9%, from the car loan EMI calculator:

On top of the interest there is usually a processing fee and a foreclosure charge if you close the loan early. RBI's rule that bans prepayment charges applies to floating-rate loans to individuals, and most car loans are fixed-rate, so that relief usually doesn't reach you. Under RBI's 2025 prepayment directions, other loans follow the lender's own policy, but the charge has to be disclosed upfront. Fixed-rate car loans often charge 2–5% of what's left.

Also, the interest gives a salaried person no tax break on a personal car. The old 80EEB deduction was only for electric-vehicle loans sanctioned between April 2019 and March 2023 (Income Tax Department page). So 9% is the real cost. Nothing comes back at ITR time.

What your FD really earns, after tax

Now the other side. Big-bank FDs pay roughly 6–6.5% for one to five years, and small finance banks go to about 7–8%. But FD interest is taxed at your slab rate every year, and that changes the picture a lot.

Even a tax-free 6.5% is well below 9%. In the 30% slab you earn 4.5% on the FD while paying 9% on the loan, a gap of about 4.5% a year on every rupee you borrow instead of paying from savings.

The higher your slab, the stronger the case for cash. Borrowing while your savings stay invested suits a business loan, where interest is a deductible expense, not a salaried person's car.

₹10 lakh car: cash vs loan, worked out

Here is the comparison most people do, and it's wrong. "My ₹8 lakh FD earns ₹3.04 lakh in five years, the loan costs only ₹1.96 lakh in interest, so I'm ₹1 lakh ahead." It ignores that the loan is being paid down from your salary every month. That ₹16,607 EMI would be free to save if you had paid cash.

The fair way is to keep your monthly outflow the same in both cases:

• Loan route: pay ₹2 lakh down, borrow ₹8 lakh for 5 years at 9%, keep the ₹8 lakh in an FD at 6.5%. EMI ₹16,607 goes from salary.
• Cash route: pay the full ₹10 lakh from savings. Put the same ₹16,607 a month into an RD at 6.5% for 5 years.

Both routes end with a paid-off car. The cash route leaves you about ₹74,600 richer before tax, and about ₹1.13 lakh richer in the 30% slab. Even with a small finance bank FD at 7.5%, cash still comes out ahead by about ₹50,500 before tax. Check the numbers on the FD calculator and the RD calculator.

The catch: the cash route only works if you actually save that ₹16,607 every month. If the "EMI money" quietly gets spent, the loan route at least kept ₹8 lakh aside. Be honest with yourself here.

If your savings are in mutual funds instead

"My money is in equity funds making 12%. Why pull it out for a 9% loan?" Fair point, so let's run that too, with the same monthly outflow.

Loan route: ₹8 lakh stays in an equity fund. At an assumed 12% a year it grows to ₹14,09,873 in 5 years on the lumpsum calculator.

Cash route: sell ₹8 lakh of funds for the car, then run a SIP of ₹16,607 a month. At 12% the SIP calculator shows ₹13,69,851.

Before tax the loan route is ahead by about ₹40,000. After equity tax (12.5% on long-term gains above ₹1.25 lakh, 20% on the last year's short-term gains, plus cess) the gap shrinks to roughly ₹10,000 over five years. And that tiny edge assumes 12% every year. At 10% the cash route wins by about ₹8,300 even before tax.

So to justify a 9% car loan, your equity money has to earn something like 11% a year after tax, with no bad patch in those five years. Possible, not guaranteed, and ₹10,000 isn't worth carrying a loan while ₹8 lakh rides the market. The exception is when selling now means a big capital-gains bill or selling after a sharp fall. Then a small, short loan can be the lesser evil.

How much to leave in the bank after paying

The strongest argument for a loan has nothing to do with rates. It's liquidity. If breaking the FDs means wiping out your savings, don't do it.

Before a rupee goes to the car, park an emergency fund that could run the house for about half a year, in an FD or a sweep-in account. A job loss or a hospital bill won't wait, and a personal loan taken in a hurry costs far more than 9%. Say your monthly expenses are ₹50,000 and you have ₹12 lakh saved. Paying ₹10 lakh cash leaves ₹2 lakh, just four months of expenses. Here a smaller loan (more on that below) is the better choice, even though it costs some interest. Being debt-free with nothing in the bank is riskier than carrying a small loan.

Same for money kept for something else. If that FD is meant for your child's admission next year, it isn't "spare" just because it's idle today.

Depreciation: the car loses value either way

A car starts losing value the day it's registered, loan or no loan. Insurers fix the insured value (IDV) using a standard depreciation schedule on the ex-showroom price:

(Schedule as published by insurers, for example IFFCO Tokio's IDV table.)

Why this matters for the loan decision: with a small down payment and a long tenure, you can owe more than the car is worth. Say the ex-showroom price is ₹9 lakh and you borrow ₹9 lakh for 7 years at 9%. After one year you still owe about ₹8.03 lakh, while the IDV at renewal is ₹7.65 lakh. If the car is stolen or written off, the insurance payout may not even clear the loan. We go deeper into this in the post on choosing a 3, 5 or 7 year car loan.

When a loan makes sense, and when cash wins

Cash is usually better when:

• You have the full amount over and above that cushion and any other near-term goals.
• Your savings are in FDs, savings accounts or debt funds earning 6–7% before tax.
• You are in the 20% or 30% slab, so your FD earns 4.5–5% after tax.
• You trust yourself to keep saving the "EMI" every month after the purchase.

A loan can make more sense when:

• Paying cash would eat into that cushion or money kept for a fixed goal.
• Your money is in equity for the long term, and selling now would mean a big tax bill or selling after a sharp fall.
• You use the car for business or your profession. Then interest and depreciation can count as business expenses, so the after-tax cost of the loan drops. Your CA can tell you how much applies.
• You get a genuinely cheap offer. Some carmakers run low-rate or "0%" schemes during Navratri and Diwali.

On "0%" offers, look at what you give up. Often the cash discount quietly disappears or a processing fee appears. Say paying upfront gets you ₹40,000 off, so ₹7.6 lakh today, or you can pay ₹8 lakh at "0%" over 36 months (₹22,222 a month). Worked out properly, that "0%" loan costs about 3.4% a year. That's below what an FD earns even after 30% tax, so here the loan is fine. But you only know if you do the maths. Since October 2024, RBI requires lenders to give you a Key Facts Statement for retail loans, with an annual percentage rate (APR) that includes all charges. Compare that APR, not the headline rate. The post on flat vs reducing interest rates explains why the quoted rate can mislead.

The middle path: part cash, part loan

You don't have to pick one extreme. For many families the best answer is a big down payment and a small, short loan.

Take the same ₹10 lakh car. Pay ₹6 lakh from savings and borrow ₹4 lakh for 3 years at 9%. The EMI is ₹12,720 and total interest is ₹57,916. Compare that with ₹1,96,401 on the ₹8 lakh, 5-year loan. You keep ₹4 lakh more in the bank, and the loan is gone well before the car's value really drops.

The last row is the one to avoid. Stretching to 7 years so a bigger car "fits" the EMI means far more interest and a real chance of owing more than the car is worth.

A good working rule: put down whatever you can without touching your cushion, borrow the rest for no more than 3–4 years, and keep the EMI small enough that it doesn't squeeze your monthly SIPs. The 20/4/10 rule (20% down, 4 years at most, EMI plus running costs under 10% of your monthly income) is a handy sanity check. If a bonus comes along, prepaying a small loan is easy (check the foreclosure charge first). The general EMI calculator shows how the balance falls year by year.

If you break the FDs, do it in this order

Say the numbers point to cash, or to a big down payment with a small loan. Breaking the FDs still needs a little care, because they are not all equal.

Start by writing down every FD with its amount, rate and maturity date. Decide first which ones stay as your cushion, ideally the ones easiest to reach, like a sweep-in on your salary account. Everything else is fair game. Break the lowest-rate ones first, and if one matures in the next few weeks, just let it run out. When you close an FD early, most banks pay interest at the rate for the period the money actually stayed, not the rate you booked, and many take a small penalty off that. Your bank's app or the FD advice shows the exact rule. It rarely changes the answer, since the gap you're escaping is about 4.5% a year in the 30% slab, but it can decide which FD goes first.

Then settle the price before the finance talk. Ask the dealer for the on-road price for full payment, in writing, and only after that ask what the loan or "0%" scheme would cost. If you do take a part loan, ask for the KFS and read the APR and the foreclosure charge before signing. Pay from your own account by bank transfer.

The step most people skip comes after delivery. On the next salary day, start an RD for the EMI you didn't take, ₹16,607 a month in our example, with a standing instruction so it leaves your account before you can spend it. That RD is the whole reason the cash route came out ahead in the table above. Without it, all you've done is spend your FDs.

So our view is plain. If you're salaried, in the 20% or 30% slab, and the money is sitting in FDs, break them for the car, keep the cushion untouched, and turn the would-be EMI into a monthly deposit. Borrow only the part you can't pay without thinning that cushion, and keep that loan to three or four years. Paying 9% just so an FD earning 4.5% after tax can stay on your passbook doesn't add up.

Written by the Gainly team for general information, not as investment or tax advice. Rates and rules change, so check the latest before you decide; tell us if something here is out of date. Contact