You don't need a math or calculator, already known case 1 will have better saving.

Car term loan works like this.
if you loan 100k, at interest rate 2.8% 5 years, they use 100K x 2.8% x 5 years then divided into 60 months as your month payment.

And this 2.8% is not an effective interest rate.
When you pay monthly payment time, your loan amount already gone down, but the interest rate is still counted using the original 100k (flat across in the first place), so the further future payment on interest charge is actually way more expensive than the first one.

For eg. if using FD method to count, when you loan left 20k, it should be 20k x 2.8% (if 2.8% is real interest rate), but we know term loan calculation doesn't work like that.

FD is more versatile, but you need it to pay down the month car payment.
Yes, in term of emergence use, it is good, more liquidity, however, this unrelated to saving part of story, but more a cash management issue.

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Added on January 28, 2012, 6:09 pm(simple illustration for understanding, and it is not correct, as it need monthly payment reduction on principal to have the accurate figure)
100k x 2.8% = 2.8k interest is paid every year with 5 year loan.

1st year, loan 100k, pay 2.8k interest = 2.8% effective interest rate
2nd year, loan left 80k, still pay 2.8k = it is no longer a 2.8%, but 3.5% already
3rd year, loan left 60k, still pay 2.8k = 4.6%
4th year, loan left 40k. still pay 2.8k = 7%.

The FD 3% only save you tiny bit in the first years, but losing big and bigger as the year progress.


This post has been edited by cherroy: Jan 28 2012, 06:09 PM

The EIR does exist, and it makes sense all together.

You cannot take one apple and compare to another orange. Simultaneously take loan 50K while 50K FD still intact.
The situation of apple vs apple is
You have 50k now, you have the choice paying the car/less loan or full loan while 50K in FD.
You cannot use FD as spare cash and 50K intact to entire 5 years to compare, you need money to service the month loan repayment.

You need to compare using the FD to pay the amount as apple vs apple.

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Added on January 29, 2012, 12:36 amBank is not stupid, they are getting better deal or gain a profit from the term loan 2.8% compared to 3% FD given to you.

The apple vs apple or so called EIR is the sole 50K ended at where. You cannot take in extra money (money servicing the month loan) + 50K in FD intact for 5 years.

This post has been edited by cherroy: Jan 29 2012, 12:38 AM