Buying a car is a dream for most of us, and these days it is a reality. Hence the dream has become a desire, and slowly now the desire is becoming a necessity. Behind buying a home, a car would be the second biggest big-ticket purchase in our lives. Hence we need to give it enough thought and consideration and its impact on our personal finance.
About the author: Ragesh G R is a Software Architect with 13 years of experience. His interests are computers, personal finance, cars, technology, maths and music. He helps his friends and family with their personal finance. Also, he actively guides physically challenged people all over India with buying and registering cars and procuring driving license as well.
At the outset, I would like to emphasis that a car is a consumption item, it is not an investment (unless you are going to use the car for commercial purposes). So it is not an asset per se, and one’s expectations need to be aligned to reflect the same. At the same time, since this is a big-ticket item for which most of us would even apply for loans, we cannot buy it like buying a washing machine. We need to apply all the seriousness that we apply while making other financial decisions. Let us look at some of the financial considerations linked with buying and maintaining a car.
Before Buying a car: This is one of the most critical phases of buying a car. This is where the biggest chunk of money will be spent.
1 What Car?
First, decide on a car that you like. Think about what are the qualities or features that are the most important to you and your family. Prioritize those parameters if possible. This should give you a rough idea of the kind of car that you want. This is purely a subjective and emotional decision, and there is no one size fits all. Someone may want a 2 seater sports car; someone else may want a 7 seater family carrier. Needs and wants are diverse.
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2 Petrol vs Diesel
This is as much a financial decision as much as it is a personal choice. Some prefer the silent and smooth, linear, rev-happy nature of petrol vehicles. Some prefer the low-end grunt and torquey, mile-munchy nature of diesel vehicles.
Having disposed of the emotional part, from a financial stand-point, most diesel cars are 10% costlier than their petrol counterparts. Add to it the fact that petrol and diesel prices are converging. Hence, unless you have a running of at least 1500 km per month, buying a cheaper petrol car would outweigh the fuel cost gains got by a diesel. However, if diesel and petrol cars are of similar price, then buying the diesel should be a no-brainer from a running cost stand-point.
3 Price of the Car
Next step would be to decide on a budget of the car. Choose a budget that won’t put undue stress on your day to day finances, as well as ensure that it doesn’t compromise your non-negotiable goals such as retirement, education, health etc. After all, a car is a discretionary purchase and hence a negotiable goal at that. Here is where a lack of a holistic view ends us in the proverbial financial soup. The budget for a car is NOT just the monthly EMI alone. That is just the tip of the ice-berg.
Consider the following parameters while budgeting for the car:
- EMI on the car loan (Ignore this if you are buying it outright) – every month.
- Road Tax (usually 10-25% over and above the ex-showroom price of the car depending on the class of the car that you are buying) – once in the lifetime of the car purchase.
- Insurance premium (Usually 1-3% of the price of the car) – every year
- Warranty (Usually 1-2% of the price of the car) – every year for the first 3-7 years as you choose.
- Regular Maintenance (usually around 0.5% – 1 % of the price of the car) – every 6 months or every year (Depending on the maintenance schedule of your car)
- Fuel (Depending on how much you plan to travel in a month) – This need not be a totally new expense, because, you may be using an existing mode of travel, say a bike, or cab or bus. So, only the difference between these two amounts will need to be considered. But beware, once you have a car, you may end up making extra family trips so have a buffer for this as well.
- Ala Carte consumables like Brake Pads, Brake discs, Clutch, Suspension, Tyres (Roughly 5-10% of the price of the car) – Roughly every 3-4 years
- Unexpected repairs – Difficult to estimate but good to have a small buffer to handle such exigencies
So as you can see, you need to add 1 to 8 up to see if that car is within your budget. For example, the EMI maybe only 10,000 per month but when you normalize all these expenses, you might find that you need to ear-mark around 15000-20000 per month for the car. For example, this might mean instead of that 20 lac D-segment, you can comfortably afford only a 12 lac C segment sedan.
Optimizing the Cash Outgo: Now that we have seen the various one time, yearly, monthly and occasional expenses that one might incur, let us see how one might optimize the same.
4 Type of Car
Consider various alternatives. Various manufacturers and various car types. For example, You may have zeroed-in on an SUV for space alone, but maybe there is a Sedan which ticks all the boxes for which you wanted to buy the SUV, but it is priced much lower.
Maybe you zeroed-in on a Sub-compact sedan for the boot, but maybe there is a Premium hatch whose boot size and shape are in fact larger than this sub-compact sedan.
Maybe you zeroed-in a Premium car, but the very same car is available under the Marque of its sister company at a reduced price.
These are things you can consider and take a call if it makes sense to your needs. Finally, you need to buy a car you like anyways.
5 Resale value
There is one of the most favourite topics of car buyers, and here is why it is overrated. As mentioned in the first paragraph, at the end of the day, a car is a consumption item, so you need to buy a car you like and take care of it and enjoy it. No point in thinking of resale value and getting stuck with a car you don’t like and then thinking about resale and selling it off the day you buy it. If you do the same, then you will be prompted to sell the car early, thereby incurring more loss than you gained by buying a car with a good resale value. Having said this, if you like two cars in all aspects, you may choose the one with more resale value—no harm in that.
6 Price of the car
Keep an eye on the price of the car and look out of discounts. They usually come up in November-December, or when a newer model is on the anvil.
7 Insurance
Take the dealer’s quote and compare with other providers. But ensure all the parameters are the same. All that glitters are not gold. Just because a provider is quoting half of what the dealer is quoting doesn’t mean it is better. It may have different terms and conditions. But most dealers will match or come close to the quote provided by online providers. Even else, one can request if they can give some discount on the insurance premium. One Note here. Don’t penny-pinch and haggle like there is no tomorrow. You will need to have an amiable relationship with the dealer service person for the next 5 years at least. Be dignified and reasonable. If we try to pull a fast one, they will pull two on you!
A few things to consider while taking insurance
- Take a B2B (Bumper to Bumper) insurance. Premium will be higher, but this will ensure that when a repair comes, you will be compensated almost 100% without pro-rating the rates for depreciation of your car.
- Return to Invoice rider. This is good to have because if your car gets damaged beyond repair (total loss) or stolen, you will get the invoice price of the car from the Insurance claim and not the depreciated IDV (Insured Declared Value) of the car.
8 Maintenance
Once you brought it home, a recurring expense that you need to take care every year is maintenance. A few steps can be taken to reduce the financial impact of car maintenance.
- Get a rough quote from the dealer before commencing the maintenance. Compare it with the Standard maintenance operations recommended by your manufacturer. This should be available at the dealership or on the manufacturer’s website. Check if they have added any extra items over and above the manufacturer recommended items. Those items are discretionary.
- For example, operations like air filter change, oil filter, engine oil, coolant, pollen filter, spark plug change may be mandatory. But operations like interior cleaning, exterior polishing, leather upholstery treatment etc. may be optional, and it is your call.
- Since you know the timeframe and rough amount, invest this amount in an 11- month RD, or low-risk Liquid fund. More than return or interest, you are accounting for this month and not scampering to conjure up the service cost suddenly at year-end.
- Be aware of any abnormalities, error lights that you see on your car and get it checked promptly. Do not be penny wise and pound foolish and run the car despite a known issue, thereby aggravating the problem and ending up in a big repair bill.
- Go through the user manual of the car to get to know your car better and the Dos and Don’ts of your car, which will help prevent user induced damages.
9 Fuel
Most cars are homologated for India and don’t come with ultra-high compression engines. So stick to the manufacturer recommended octane of fuel, and stick to the normal fuels. The Ultra/Premium/Super etc. with additives are just placebo.
But go to a good quality reputed fuel station. I prefer COCO pumps (Company Owned Company Operated). The above steps help you in two ways:
- You save money by not spending on expensive fuels.
- You save money by not damaging your injectors/engine by using adulterated fuels.
10 Driving
The proof of the pudding is in the driving. There are a few things one can do while driving to take care to reduce service and repair bills.
- Run in the car, as mentioned in the user manual.
- Please don’t give it the beans as soon as you start the engine on a cold morning. Let it warm up, and fluids circulate.
- Be gentle on potholes and speed humps to safeguard your suspension and wheel alignment.
- Get wheels rotated and aligned at least every 5000 km to ensure equal load and wear and tear distribution across all the tyres.
- Keep the tyres inflated properly as per recommended levels.
- Don’t lug the engine at too low an RPM in the name of eking out the last drop of fuel efficiency.
11 Sell or Keep?
This applies to only those who are in a dilemma to either sell or keep their old car. Otherwise, go ahead and buy that new car if you can comfortably afford it. Just like in investing, compounding applies in car depreciation too, but negative compounding. Hence, the depreciation will be steep in the first 2-3 years then it will slow down. Most car loans run for 4-5 years and the itch to upgrade starts as soon as the loan is over. Keeping the car after the loan is over and your equity on the car is 100% is when you actually achieve the maximum utility (financially speaking). The extra cash outgo, as well as the lost opportunity cost of the money that you could have otherwise used investing etc., will far outweigh the extra maintenance bill that you will incur if you keep the car for say 3-5 more years (Totally 8-10 years of ownership)
12 Special cases
If you are a physically challenged car buyer, then ensure you exercise the following concessions:
- GST concession (not full exemption) – only if your car is a “small car.”
- Road tax exemption (for any car)
- 50% discount on the Own Damage premium component (not full 50% discount)
- Toll-free FASTAGs (Getting it is a challenge though)
13 Summary
Car is a consumption item, and buying a car is as much an emotional experience as much it is a financial one. But if we analyze the financial impacts and plan accordingly, we can have years fun without breaking the bank.
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