**Q: I have ₹ 10,00,000 in my savings account and want to buy a car. Should I buy a car with it or it’s better to take car loan and make a FD from my savings? **

Let’s capture everything needed to understand and identify the best option

**Interest: **It’s the cost we pay on the money we borrowed or the cost we get on the money we invested.

**Types of interest:** There are two types of interest. Simple interest and Compound interest.

**Simple interest** is easy to calculate and understand. It’s the cost on the principal amount we borrow or invest.

For example. If you borrow ₹1,00,000 for student loan at 8% simple interest rate for 5 years. Then it will be

1,00,000 * 8/100 = 8000

Principal amount * rate of interest = interest amount

**Compound interest** is a bit complex because in compounded interest, the interest is paid on the interest along with the principal amount.

For example. If you borrow ₹1,00,000 at interest rate of 8% compounded annually for 5 years. Then

1st year is 28000= 1st year amount+ 8% interest on 1,00,000

**20000 + 100000*8/100**

2nd year is 28640 = 2nd year amount + 8% interest on (1,00,000+ 1st year interest amount)

**20000+ 108000* 8/100 = 28640**

3rd year is 29331 = 3rd year amount+ 8% interest on (1,00,000 + 1st and 2nd year interest amount)

**20000 + 116640*8/100 = 29331 **

and so on. So the last payment will be 110833.

**The total interest payable was 8000+8640+9331+10077+ 10883 = 46931. **

All the house loans , FDs, student loans are having compound interest. The most common example of simple interest is automobile loan and credit cards.

### Now let’s get to the question.

If you will buy a car on EMI and invest 10 lacs in FDs . Then:

EMI will be based on simple interest hence it will be ₹536393. Total amount payable will be ₹15,36,393

Now as we know, if you will invest 10 lacs in FDs at the interest rate of 8%. You will be attaining compound interest of ₹12,19,640. And the total maturity amount will be ₹22,19,640.

So if we do simple maths, FD interest-Car Interest we are left with profit of ₹ 683,247.

And when you are in profitable situation by taking loan, it’s better to take loan rather than going for cash purchase.

**Read related posts: **