An Article From Economictimes (Investor Guide) About Car Hi all,
For those who missed reading an article from Economic Times,Investor Guide suppliment published on Monday....it gives indepth study of financial calculation needed to own & run new cars.....its very interesting..... Racing ahead? Just brake and think
MUTHUKUMAR K
TIMES NEWS NETWORK[ MONDAY, SEPTEMBER 11, 2006 02:35:01 AM]
Owning cars is about sheer passion and adrenaline rush for some. But then what’s the ‘price to passion’ ratio? If the latter denotes the joy of ownership, and the former the price you actually pay in real terms to own a car, then as a car buyer, you need to ask the above question and also answer it with a lot of conviction.
Contrary to popular belief, owning a car is not just about making that one-time payment or paying those EMIs. The running cost in terms of fuel costs, maintenance, insurance, depreciation, interest payments is often significant.
Big Bucks’ calculations reveal that the average cost of running a car is anything between 50% and 80% of the total EMI outgo on a car. This is substantial. Therefore, take a holistic view while buying a new car.
The price of popular cars today ranges from Rs 2 lakh to Rs 12 lakh. Let’s assume you were to buy a new car costing Rs 5 lakh and use it for five years. The usual way to analyse affordability is to look at its EMIs and see if they fit the bill (i.e. your monthly income levels).
For a Rs 5-lakh car, EMI payments roughly come to Rs 8,600 on a five-year loan with 80% financing. But then, there is much more that you pay besides the EMI. Our calculations show that additional recurring costs could be as large as Rs 5,850 per month over a five-year period. Fuel is the single largest expense in running a car. It is roughly 50-60% of overall running costs for a car owner and it’s only rising. Take the case of retail petrol prices in India, which have gone up by 55-60% in the past three years.
Higher petrol prices are hitting the car owner much more than before. Here’s how. Assume you run 15,000-22,000 km a year. Depending on the car, you get 10-15 km per litre. This means you spend in the range of Rs 2.5 lakh to Rs 5.5 lakh over five years.
This figure again assumes you’re a model driver, and juice the car for what its worth. If you are going for a diesel version, you save some bucks, depending on whether the diesel version exists for the particular version you want to buy.
Then, there are maintenance and servicing costs. If all goes well, you may get away with the usual servicing costs, which could be anywhere from Rs 2,500-5000 a year.
But things are seldom as easy. Changing of tyres, shock absorbers, air filters, clutch plates, break pads, batteries are usual in the span of first five years. Throw in floods and potholes for good measure and you need more servicing.
We estimate a typical car owner will spend up to Rs 32,500 over five years on this. Car owners usually have to replace a whole set of tyres once every three to four years. A whole set of five tyres will cost Rs 10,000-22,000 depending on the car. Then factor in the compulsory car insurance.
The insurance premium you pay for a comprehensive policy is directly proportional to the value of the car. Car insurance is today fixed on the insured’s declared value (IDV), which is roughly its market value.
Rough calculations show that for a Rs 5-lakh car, one could be paying around Rs 60,000 as insurance premium over a five-year period. With the de-tariffing of car insurance coming into effect from next year, premiums could get even higher if you are on high accident zone, wear spectacles, ride a red car among others.
Then, car buyers often ignore depreciation or the losing market value of the car on usage. Buy a car, use it for a week and try and sell it and you know what is being talked about. Over a five-year period, the average depreciation has been around 50%.
A lot depends on the second-hand market of the model under consideration and customer preference for such models going forward. In the worst case, you may get only 25% of the original cost.
Lastly, there are those interest payments if you are taking a loan. On 80% financing, you could paying an interest of Rs 1.2 lakh over a five-year period. In total, you will be shelling Rs 4.6 lakh over a five-year period almost equivalent to the cost of the car, or 20% every year as running costs.
The actual costs could be very different based on the value of car and, as a thumb rule, will be more for small cars since fuel costs constitute the significant part of overall running costs. So do your due diligence In the end, know that owning a car is not just about making those one-time payments. There is much more to it. The rising fuel prices and the overall running costs may actually make you rethink your decision. Do your due diligence. After all, it is the second most important asset you will probably own in terms of value.
Last edited by finetuning : 12th September 2006 at 15:49.
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