Important things to know before you buy a car

Author
Sanjay Sengupta

The moment we all start earning, we start spending them on things we want. One such “Want” is to own a car. For many people, owning a car is a “Status Symbol”, while for others, it is required for carrying out their daily businesses, in other words,“Need”. Buying a car is easy, however, “Is it really beneficial?”; “What type of car can I afford?”; “How much car loan should I take?

This article will guide you to decide if you really need to buy a car or not.

 

A. Factors to Consider Before Buying a Car: 

I. Depreciation:

Once you buy a car and it is out of the showroom, the value of the car starts depreciating. 

As per Indian Motor Tariff, depreciation rate is as follows:

Less than 6 months – 10%          

6 months to 1 Year – 15%             

1 Year to 2 Years – 20%    

2 Years to 3 Years – 30%

3 Years to 4 Years – 40%

4 Years to 5 Years – 50%

Today, if you buy a car of Rs. 8 Lakhs, it's value will reduce to half (i.e. Rs. 4 Lakhs) after 5 years. Thus, you incurred a loss of “Rs. 4 Lakhs” (Rs. 8 lakhs – Rs. 4 Lakhs) which you could have saved by not buying the car in the first place and invest it to buy a much better one in future.  

Source: Motor Vehicles Act, 1988

 

II. Interest Cost:

In India, people buy a car mostly through car loans and eventually, high interest cost is involved while paying EMIs.

For example, you bought a car of Rs. 8 Lakhs by taking a loan of Rs. 6 Lakhs with an interest rate of 10.50% p.a. for 5 years. Thus, the total interest payable is Rs. 1.7 Lakhs.

You can avoid paying such high interest amounts either by making higher downpayments and taking less loan or wait for 2 to 3 years and invest your savings in FDs; RDs or MFs thereby generating a higher corpus and buying the car without any

III. Frequent Buying and Selling:

Let’s consider that you buy a car of Rs. 6 lakhs now. After 3 years, you sell your first car to buy a new one of the same prices and use it for 3 years. The total depreciation combining both the cars is Rs. 4 lakhs which you could have avoided by not buying the second car.

It is advisable not to buy and/or sell car on a frequent basis, save that money and invest them for achieving other goals.

 

IV. Choosing the Right Car:

It’s important that you are aware of your reasons behind buying a car. Your decision of buying a petrol or a diesel car depends on your purpose of using it. Buying the appropriate car can be based on 3factors:

i. Comfort: Diesel cars generate more noise and vibration than petrol cars making it less comfortable. However, with the advent of the BS VI norms, it is expected that the diesel cars will provide the same comfort like a petrol car.

ii. Financial Perspective: Diesel cars are a bit expensive to buy due to their costly variants and high maintenance cost. However, diesel cars are more economical in terms of high mileage, low diesel price and higher shelf life and therefore, can prove its money’s worth in future.

iii. Purpose: Diesel cars are suitable for people who are engaged in long distance driving across the city or on highways. People living in urban cities and looking to change their vehicles every 5 to 6 years should opt for a petrol car.

 

B. Ways You Can Own A Car:

i. Opt for investments: Create the habit of investing in financial instruments like FDs, RDs, Mutual Funds etc. The longer you invest the better the rewards. In this way, you can save the entire interest cost.

ii. Part investment part loan:

You can also opt to buy car through 50% investments and 50% loan. Considering you are purchasing a Rs. 800,000 vehicle you can make a down payment of Rs. 400,000 (which you have acquired through investments) and take a loan of Rs. 400,000. In this way you can save Rs. 55,000 (approx.)

iii. Opt for a second hand car:

Currently, if you cannot afford a new car, however, you need one on an immediate basis you can opt for a second hand car which is not more than 2 years old. In the meantime, you can save to buy a new one in future.

However, if you are buying a new one, make sure that you use it for a long term preferably more than 5 years.

iv. Don't buy a car at all:

It might sound strange but this is the most effective solution one can think of especially when your “Per Day Running” is less and your wish to buy a car is a “Want” and not a “Need”. Moreover, instead of buying a car, you can make use of services like “Ola” and “Uber” for your rides as well or travel in public transport network.

 

With the introduction of the BS VI norms in the Motor Vehicle Act, all cars available in the showroom from April 2020 on wards will be more efficient and eco-friendly, however, a bit expensive. Nevertheless, through disciplined “Savings & Investment”, buying a car is not a difficult. As always, it’s advisable to prioritize your “Needs” and “Wants” and spend accordingly. You can achieve bigger goals in life if you start investing now.

Save Big

Invest Right

Spend in Style

header created using pixabay
About the Author
Sanjay Sengupta
Sanjay Sengupta is a Financial Analyst at 7Prosper. It is his firm belief that every person has the right to dream and achieve them without any financial compromise. This keeps him motivated to observe and study more about the financial markets and use that experience to make efficient financial plans for people thereby, guiding them closer to their dreams.

Learn More