Neither a borrower nor a lender be." This, says Vishal Mehta, a young urban professional working with an ad agency, is not his avowed investment philosophy. Just a practical adjustment to current realities. Last year, he had bought a new Hyundai Santro, and like most new deals on wheels, it was financed by a car loan. A loan of Rs 2.5 lakh. It made good sense to him back then. Interest rates on consumer loans had come down drastically, from around 19 to 15 per cent. "Go for that loan now," he was told, "rates have never been better."

Vishal did, and was pleased with himself for making good use of the falling rates. He had always prided himself in being financially aware, whether it was an investment or purchase decision. But then, interest rates collapsed even further. To 12 per cent. And the old rate started looking distinctly usurious.

Vishal gnashed his teeth a bit, and then got a brainwave. He was reading something in a magazine about corporate India restructuring its debt, swapping old debt for new, and he wondered: why not him too? Why pay 15 per cent as interest when the prevailing rate was lower? Good question.

The Big Burden

It was good, too, as any financial advisor would testify, that Vishal was thinking of himself as a fiscally prudent economic agent, keen to get the best deal-as any business would. But when Vishal first went out scouting for information to resolve his difficulty, he only returned with a bigger headache. The system seemed loaded against wise-guys like him.

The first thing Vishal discovered-to his chagrin-was that businesses differ from individuals in their loan-seeking behaviour. Businesses, for a start, take loans even when they can afford to buy cars outright. This is because they are heavily incentivised to buy cars on loans. "While car loan rates themselves have become attractive post manufacturer discounts etcetera," explains S. Ramakrishnan, Vice President and Head of Retail Lending, HDFC Bank, "Businesses can claim the interest paid on these loans as an expense, and they even get to book depreciation on the asset (that is, the car), lowering their taxable income even further." This also applies to doctors, consultants and other self-employed professionals who get to claim the loan instalments-plus petrol, maintenance and other running expenses-as a deduction for the estimation of their taxable income. This is because the car is seen by the law as a work requirement.

But Vishal had taken a car loan as a salaried individual, and he was not eligible for any work expense claims. For him, the car was to be treated as a sort of indulgence, and so the instalments were to come out of his taxable income, like any other consumption.

Since he didn't have a personal balance sheet, there was no question of any depreciation deduction either. It was a double-whammy. He was paying an interest rate much higher than what a business would find acceptable, and was getting slammed by the taxman as well. And he was in the highest tax slab, paying almost a third of his income to the government.

This troubled Vishal no end. His initial logic, though, and justification for taking the loan in the first place, had been to invest his bulk savings to earn a return sufficient to cover the instalments. But given the poor state of investment returns, this wasn't adding up at all.

Back of the envelop, his finances looked bleak. He was paying an annual 15 per cent for the car loan. But to cover this comfortably (to get a decent 'spread' between money loaned and borrowed), he figured he needed to generate returns of at least 22 per cent on his savings. And that was proving impossible, given his low tolerance of risk. Even tax-free government bonds would deliver no more than 7 per cent. The bottomline: it was a loser's game. And Vishal didn't like it one bit.

The Big Relief

So, wondered Vishal, shouldn't he cough up his savings to retire the expensive car loan? He worked out the numbers, and concluded that it's best getting out of any loan deal (except a home loan with good tax breaks) charging him over 14 per cent per annum.

Just one hitch. His savings, at Rs 1.5 lakh, were not enough. If he were to repay this sum, his monthly instalment could fall from Rs 9,000 to Rs 4,000-odd.

But even that did not work out. The finance firm flatly refused to consider a part pre-payment of the loan. Any further questions only seemed to put the officials off. Moreover, even if he pre-paid most of the outstanding amount, the car's ownership documents-and thus the real power to determine proceedings-would remain with the finance company.

Another way out would be to take a separate personal loan (at a lower rate) for the remaining amount, Rs 1 lakh, repay the entire car loan and get full legal possession of the car. Would that do the trick?

Vishal was mulling the idea when a friend came up with another suggestion. Why not exhaust the unexhausted limit on his home loan?

A-ha! And that's exactly what he did. Vishal had drawn a home loan two years ago, and was eligible for a 'top-up loan' (no questions asked)-subject to a ceiling of 85 per cent of the value of the property (while its ownership papers rest securely in the bank's vault). So Vishal took another Rs 1 lakh, pulled out his savings, and bought his way out of his car loan.

How does this help? A burdensome loan has been replaced by a lighter one. The home loan is of a much longer duration (15 years), and the rate is lower too. In all, the instalment on the Rs 1 lakh top-up is under Rs 1,000 per month. But the big relief is that the car loan's burden of Rs 9,000 is gone-poof! Vishal can deploy this money elsewhere. His message for all ye loan-sufferers: it pays to be a wise-guy.