How can a 6.6% FD Outperform a 12% Personal Loan – Mathematics Behind The Shocking Truth

Query: Should I Use an FD to finance the purchase of my iPhone Pro Max 1TB?

Suppose I need to buy this phone which will cost me about Rs. 2,00,000. I have this much money as cash in my bank account.

But I want to put this money in FD which will fetch me about 6.6% return (for 5 Years). Based on this deposit, let’s say I get a person loan (with 100% financing). Which means, for a Rs. 2 Lakh deposit, I will get a Rs. 2 Lakh loan for five years.

On this loan, let’s assume that I have to pay 12% interest but on reducing balance rule.

How to mathematically prove, if this method of gadget purchase financing is better or I should buy it directly using cash (no loan method).

Introduction

Buying a top-end iPhone is no longer just a simple shopping decision. It can turn out to be financial puzzle if we decide to not to buy it using plain cash. Like what’s happening with one of my readers (above query).

In the email, the person disclosed that as the price touched 2,00,000, he pause for a moment to rethink his buying strategy.

He is thinking, Should this money go straight from his bank account, or can it be put to work before the big purchase?

This is where the idea of using a Fixed Deposit while taking a personal loan comes in.

It sounds clever because on one side we can earn interest on our FD while we pay EMIs on the loan.

We simply want to understand what happens mathematically when the FD only earns 6.6% while the personal loan costs 12%.

This brings us to this question that is it really worth paying 12% interest on loan and earn only 6.6% on FD?

The Basic Setup

You want to buy an iPhone Pro Max 1TB worth about Rs. 2,00,000.

You already have Rs. 2 lakh sitting in your bank account. On paper, the easiest approach is to pay from your savings and walk out with the phone. No interest, no commitments.

But suppose your bank gives you another option. You place that Rs. 2 lakh in an FD for five years at 6.6% annual interest (compounded yearly). Against this FD, you get a fully financed personal loan of Rs. 2 lakh.

Because it is a secured loan, banks often lend the same amount as your deposit. The loan runs for 5 years at 12% interest with reducing balance EMI.

But now the question is, if the FD grows at 6.6% and the loan is costing me 12% (almost double), is it worth considering this method of iphone financing or not?

Step 1: Understanding the Loan’s Cashflows

A 12% per annum rate becomes 1% per month in EMI calculations (approximately).

The loan is Rs. 2 lakh for 60 months.

When we apply the standard EMI formula (reducing balance method), the EMI comes to about Rs. 4,453.50. This is a normal figure for unsecured loans in India of this size and tenure.

Now, we will multiply the EMI with the number of months (= 5*12). The total repayment works out to roughly Rs. 2,67,210 (= 5553.5 x 12 x 5).

You can think of this as you iphone costing you about Rs. 2 lakh plus an extra Rs. 67,210 in interest spread over five years.

This is the cost of convenience and capital availability.

For most people, this is where the story ends. Loan equals extra interest. But with an FD backing this loan, the second part of the equation becomes important.

Step 2: Future Value of FD

A five-year FD at 6.6% annual compounding grows slowly.

Applying the compound interest formula, the Rs. 2 lakh becomes roughly Rs. 2,75,300 at the end of five years.

This growth of Rs. 75,000 is the total interest earned on the FD.

Now we can draw the conclusion more clearly. Compare the Rs. 75,000 (FD interest) with Rs. 67,000 (loan interest).

From this comparison, we can conclude that the FD route is obviously better. But, I think, that’s an oversimplification (see the application of present value concept in step 4).

But this is true that when we place both amounts side by side at the end of five years, the FD leaves you with around Rs. 7,790 more than what you paid in EMIs.

It’s not a huge difference, but it is positive. That means the FD-loan method technically wins.

Step 3: Why 6.6% “Beats” 12%

At first glance, it looks absurd:

FD earns only 6.6%
Loan charges 12%
Yet, the FD + loan route comes out slightly better than paying cash.

How is that even possible?

The key reason is the reducing balance method on the loan.

• Your FD interest is calculated on the full Rs. 2,00,000 for all 5 years (with compounding).
• Your loan interest at 12% is calculated on a “shrinking principal.” It means, every EMI you pay reduces the principal. So next month, interest is calculated on a lower amount, then lower, and so on.

So the 12% is not 12% on Rs. 2,00,000 for all 5 years. It is 12% on a balance (reducing principal) that keeps going down.

That’s why, in rupee terms:

• Total interest paid on loan (at 12%) = ~Rs. 67,000
• Total interest earned on FD (at 6.6%) = ~Rs. 75,000

Even though the loan rate is “higher”, you pay it on a shrinking base. The FD rate is “lower”, but it is earned on the full amount.

This gap is what creates that small net benefit (around Rs. 7000) in favour of the FD + loan route.

It feels counter-intuitive when you only look at percentages, but a detailed calculation explains why it is so.

Step 4: Where Present Value (PV) Comes In

Now, let’s address a very important question.

Should we also consider the present value of the FD maturity value (Rs. 2,75,000)?

Strictly speaking, yes. That is the more correct way to think about it.

When we say:

• FD matures to Rs. 2,75,000 after 5 years
• Total EMIs paid are Rs. 2,67,000

And then we simply subtract: 2,75,000 – 2,67,000 = Rs. 8,000 gain, we are implicitly assuming that:

• Rs. 1 today and Rs. 1 after 5 years are “equal”.

In real life, that’s not true. Money today is more valuable than money in the future. That is exactly what PV tries to capture.

A more accurate way to arrive at a more optimum conclusion is this:

1. Take the net benefit at the end of 5 years (around Rs. 7–8k).
2. Discount it back to today using a reasonable rate (risk free rate).

For example, if the net gain after 5 years is, say, Rs. 8,000 and you discount it by a factor of 7% per year, the present value of that gain is roughly:

PV ≈ Rs. 8,000 / (1.07)^5
≈ Rs. 8,000 / 1.40
≈ Rs. 5,700

So, in today’s terms, the “real benefit” of doing the FD + loan combination might be somewhere around Rs. 5,700.

Someonw might say, it is not a huge number. But it is still positive.

Comparison Table

Conclusion

What looks surprising at first is actually very logical once we understand how loan mathematics works.

Even though the FD earns only 6.6% and the loan charges 12%, the FD route still turns out slightly better than paying cash.

This happens because the loan interest is calculated on a reducing balance.

The EMI paid each month keeps cutting down the principal. So, the 12% is never charged on the full Rs. 2 lakh for the full five years.

But the FD earns interest on the entire Rs. 2 lakh every single year.

That difference, shrinking loan vs. full FD, creates the small financial advantage.

[Please Note: The point at which both methods would cost exactly the same, the break-even FD rate comes to around 5.8% for the same loan structure. Below that rate, buying with cash becomes better. Above it, the FD-plus-loan strategy starts giving you a net gain.]