[rageshgr]

Financial Considerations and Optimizations while Buying and Maintaining a car

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.

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 taking other financial decisions. Let us look at some of the financial considerations linked with buying and maintaining a car.

Before Buying

This is one of the most critical phases of buying a car. This is where the biggest chunk of money will be spent.

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.

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 a petrol. Some prefer the low end grunt and torquey, mile-munchy nature of a diesel.

Having disposed off 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 the diesel and petrol cars are of similar price, then buying the diesel should be a no-brainer from a running cost stand-point.

Price of the Car

Next step would be to decide on the 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:
1. EMI on the car loan (Ignore this if you are buying it outright) – every month.
2. 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.
3. Insurance premium (Usually 1-3% of the price of the car) – every year
4. Warranty (Usually 1-2% of the price of the car) – every year for the first 3-7 years as you choose.
5. 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)
6. 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 in these two amounts will need to be considered. But beware, once you have a car, you may end up doing extra family trips so have a buffer for this as well.
7. 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
8. 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 may be 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.

Type of Car

Consider various alternatives. Various manufacturers and various car types.
For example:
You may have zeroed-in on an SUV for the 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.
May be you zeroed-in on a Sub-compact sedan for the boot, but maybe there is a Premium hatch whose boot size and shape is in fact larger than this sub-compact sedan.
May be 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.

Resale value

There is one of the most favorite 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.

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.

Insurance

Take the dealer’s quote and compare with other providers. But ensure all the parameters are 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
1. 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.
2. 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.

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 a car maintenance.
1. 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 in the manufacturer’s website. Check if they have added any extra items over and above the manufacturer recommended items. Those items are discretionary.

2. 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.

3. 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 monthly and not scampering to conjure up the service cost suddenly at year end.

4. 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 in spite of a known issue thereby aggravating the problem and ending up in a big repair bill.

5. Go through the user-manual of the car to get to know your car better and the Do’s and Don’ts of your car which will help prevent user induced damages.

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.

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
1. Run in the car as mentioned in the user-manual.
2. Don’t give it the beans as soon as you start the engine on a cold morning. Let it warm up and fluids circulate
3. Be gentle on potholes and speed humps to safeguard your suspension, and wheel alignment
4. Get wheels rotated and aligned at least every 5000 km to ensure equal load and wear and tear distribution across all the tyres.
5. Keep the tyres inflated properly as per recommended levels.
6. Don’t lug the engine at too low an RPM in the name of eking out the last drop of fuel efficiency.

Sell or Keep?

This IS applicable 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)

Special cases

If you are a physically challenged car buyer, then ensure you exercise the following concessions:
1. GST concession (not full exemption) – only if your car is a “small car”
2. Road tax exemption (for any car)
3. 50% discount on the Own Damage premium component (not full 50% discount)
4. Toll-free FASTAGs (Getting it is a challenge though)

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.

[saikarthik]

Buying a car is always a big decision for at least middle class families and one should not take it alight while deciding the purchase - what and how.

Sorry, for going a bit off-topic

If I had to buy a car then, I would think about the following.

1. Necessity: Is a car really required now?

This applies to anyone who wish to either upgrade from a 2-wheeler or from a basic car.
It may depend on many factors - purpose, frequency of usage, family etc...

2. Requirement:

If I can justify the first condition, then I list down my requirements based on the

a. Usage - daily commute or long distance travel or off-road.
b. Commute - short/long trips.
c. Family size,
d. Boot requirement
e. geographical,
f. Power train - fuel type,
h. Body type - Hatch, SUV to Premium,
i. Driver - who will use in the family,
j. Transmission - AT/MT/AMT,
k. Space available at my home - for Parking,
l. How long do i wish to own it.

and a lot more.


2. Budget:

I assess my current and future financial status, then I make the target price range for the vehicle with maximum ticks on the above list(with Priority).
Then I can drill down to how much downpayment I can do while purchase, how much EMI I can afford to pay adding to projections of my monthly spending vs income.

3. Choosing the car: Looks easy, but we know its not (Heart-Mind struggle) when on tight budget.

4. Then the real negotiation starts for the quotes,

a. negotiations with all the local dealers and different companies (if shortlisted cars are from different companies) and prying for discounts however possible,
b. pulling all the favors from friends and acquaintances for additional discount,
c. Exchange options (if I had an old car and wish to sell it),
d. fighting with the dealer to forego the handling charges and what not,
e. Asking for additional accessories or services,
f. Choosing the lowest interest rate for finance and with a lot of benefits (no foreclosure /pre-payment charges, low processing fee)

It is important to keep a well experienced friend with you while making any negotiations with dealers.

[ramnaresh_2000]

Great article. I totally agree with almost all the points mentioned. I had done zero planning on finances when I purchased my 1st vehicle and went ahead with maximum car loan. I took a loan for 5 years and ended up paying 2.5 lakhs interest to the bank even when I pre-closed it with 2 years left. This was an eye-opener to me, I decided my next vehicle (whichever it is) will be 100% loan free. I started saving from few years now and also sold my current vehicle for a decent price.

Below are my learning/observations from my past purchases

• Always go for less loan as possible.
• Always buy Zero Dep insurance, this is not the place to compromise.
• Check online prices for insurance from sites like policybazar and local agents to get best price and add-ons.
• Make part payments to loan whenever possible (like yearly bonus amount etc).
• Always check loan interest type (fixed interest or floating interest).
• Research on yearly maintenance and parts prices before writing the check. (I eliminated a lot of vehicles with this process).
• Use online calculators to find out Diesel vs Petrol type vehicle based on your usage patters (do not trust Maruti calculator, no matter what you input, it will always show Petrol is right choice for you).
• Aim for base to mid variants, most of the features are covered in mid variant.
• Features like central locking, touch screen, alloys, leather seats, steering mounted controls, HID, Fog lamps etc can be retrofitted outside. These fittings will not void warranty. Most of the dealers will fit them for you if you buy directly from them.
• Always wait for V2.0 vehicle from manufacturers like Tata & Mahindra (TUV300, Harrier are good examples).

Having said all these things above, we TBHPians always listen to Heart over Mind when it comes to our favorite beasts

[2000rpm]

Originally Posted by rageshgr

[b]
[b]What Car?
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.

You completely forgot one very important dimension.

Used vs New - This changes the equation completely. I used to drive a Civic when I was an analyst (same car as my Managing Director), thanks to this route

[turbowhistle]

Originally Posted by 2000rpm

Used vs New - This changes the equation completely. I used to drive a Civic when I was an analyst (same car as my Managing Director), thanks to this route

This!!

I remember shuffling between i20 and Duster when my boss had Brio and his boss had Dzire. I have heard jokes about this at almost every office party.

The equation is totally different when the car is used. You can listen to your heart and get whatever you wish for if you are patient enough. Just keep some money aside for maintenance though.

[Scorpio80]

I have a slightly different opinion about loan. Based on my analysis, if one has already earmarked car related money and invested in appropriate avenues, car loan can actually be at no to minimal cost.

I just bought a car with full financing. Amount equivalent to loan taken is already invested and giving me higher returns that the car interest rate. So I am actually not paying any interest at all, since the the returns from the investment takes care of the car loan interest.

The situation becomes different if one saves that money in regular FDs which never give returns equivalent to car interest rate.

[AirbusCapt]

Loan versus outright buying. Keep in mind, a loan always calculates interest using simple interest, an investment always uses compound interest. Incase we look at a loan of 5 lakh @12 percent for 6 years, the interest component is 3.6 lakh, however the same 5 lakh invested at 12% compound interest for 6 years generates 5.24 lakh as interest over the principal. So for those of you who want to buy using your savings, you end up losing 1.64 lakh as interest over 5 years compared with taking a loan.

Hence there is no one single size fits all strategy, each person needs to see which option gives you the best results.

[aniyo]

Hi All,

Great thread. I am very careful when recording my expenses and on car this is up to date.
Car: Nexon XZ+ Diesel
On-road Bangalore Including insurance: 11.70 L

Cost that I have incurred over the 21,000KM are as below

Total:


Fuel:


Expense (INR 92,650):


Service:

[tirumalavoleti]

Wan to add one point:
If one zeroed on a car, please check the competition launches and offers being provided. Sometimes, to balance the competition your car manufacturer also increases the offers.

[pratika]

Originally Posted by AirbusCapt

Loan versus outright buying. Keep in mind, a loan always calculates interest using simple interest, an investment always uses compound interest. Incase we look at a loan of 5 lakh @12 percent for 6 years, the interest component is 3.6 lakh, however the same 5 lakh invested at 12% compound interest for 6 years generates 5.24 lakh as interest over the principal. So for those of you who want to buy using your savings, you end up losing 1.64 lakh as interest over 5 years compared with taking a loan.

This calculation is correct, but conclusion isnt. The reason you end up paying less total interest on a loan is because with every EMI you pay to your bank, there is an interest component AND a principal component. Since you pay some principal amount each month and given that interest is computed on outstanding amount, your interest outgo reduces every subsequent month (assuming constant interest rate).

The principal that you pay has an opportunity cost. When you pay principal component to your bank and if it decides to invest that money at same rate of interest that it has lent you money, at the end of the term the bank will end up with same total interest as your other calculation above.

[ash22]

One should never get into Prestige trap.
Owning a car is not a prestige and it is a burden/commitment.
Even if you earn 5 Lakhs per month, If your requirement is just 500 Kms per month, A simple hatchback would solve the purpose rather than 40 Plus lakhs SUV.

I personally feel, Buying a car in loan/full is not an big deal. Recurring maintenance with insurance/service/wear&tear is the concern.

[chinmaypillay]

Excellent topic and very valid points. I keep a rule of thumb to buy the car with outright cash if used, or at least cover 70% to 80% of the cost (remaining through loan if required). Interest rate on used cars are too high and does not justify taking it.

For new cars, if you have excess cash to afford (other living costs) only then buying the car outright will full payment is recommend IMO. Otherwise, taking a small nominal amount of loan is not a bad option.

Additional point I feel is you can look out for cars just before their facelift, if you are not conscious about the old looks. For example, I got the Figo just before the minor facelift in 2012. It had sorted out some issues like Ground clearance compared to the 2010 model.
But for models like Tata and Mahindra getting the second facelift model is highly recommended.

Going for the top end model is recommended if you are looking to hold the vehicle for more than 6 to 7 years, the additional cost and features would justify the time frame. With ABS and airbag being common from the base version onwards, getting the base/mid variant would suffice most of the time. City use/second car can use only base version, again a personal opinion.

[AirbusCapt]

Originally Posted by ash22

One should never get into Prestige trap.
Owning a car is not a prestige and it is a burden/commitment.
Even if you earn 5 Lakhs per month, If your requirement is just 500 Kms per month, A simple hatchback would solve the purpose rather than 40 Plus lakhs SUV.

I personally feel, Buying a car in loan/full is not an big deal. Recurring maintenance with insurance/service/wear&tear is the concern.

I differ with you regarding this. Why would I earn a decent amount of money and settle for a hatchback? If I need a hatchback then why work hard to make 5lakh? Even for 500km a month the comfort and luxury of a 50 lakh car is worth it. The worst thing to be is earn decently and be a miser.

[ramnaresh_2000]

I did a little digging on car loan interest rates vs FD savings. I considered HDFC calculator for this purpose. Lets say I am currently having 10 lakhs and invest in FD for 5 years, I would be getting 3.4 lakhs interest at end of the tenure, however, if I take car loan at 8% interest, I end up paying 2.3 lakhs interest to the bank. Straight savings of 1 lakhs plus extra 12 lakhs in hand at end of tenure.

If we go with high risk investments like stocks or FD's, then returns might be even double than FD's or if you are noob like me you may end up with 30% loss in stocks.

I would suggest below for stress free life

• If you can afford car with zero loan, then go for it. Peace of mind of no EMI's every month is a boon.
• If not taking loan, just imagine you are taking a loan for 5 years and invest EMI amount of lets say 20k in FD's or MF's.
• If taking car loan, always pay minimum 30% down payment. Always go for 3-5 years loan repayment tenures. If you opt for 7-10 years, then I am sorry you cannot afford a car.
• Look for banks which offer minimum pre-closure charges. HDFC charged me 3% on outstanding principal amount when I did a pre-closure of my loan. I guess SBI has zero charges, please check all banks.
• Always do pre-payments whenever possible and reduce either your EMI amount or loan tenure.
• If going for used car, never go for Used car loans, better pay 50% down payment and rest in personal loan.

[Ultim8]

Originally Posted by ash22

One should never get into Prestige trap.
Owning a car is not a prestige and it is a burden/commitment.
Even if you earn 5 Lakhs per month, If your requirement is just 500 Kms per month, A simple hatchback would solve the purpose rather than 40 Plus lakhs SUV.

Originally Posted by AirbusCapt

I differ with you regarding this. Why would I earn a decent amount of money and settle for a hatchback? If I need a hatchback then why work hard to make 5lakh? Even for 500km a month the comfort and luxury of a 50 lakh car is worth it. The worst thing to be is earn decently and be a miser.

I guess @ash22 didn't mean to say that one shouldn't buy a "40 lakh car" just because a "simple hatchback" fulfills the purpose of running less than 500 kms a month.

He just suggested not to buy an expensive car only for the sake of prestige or status which I agree with. But if one feels that an expensive car will suit his/her requirements like comfort, driving pleasure, etc., why not go for it, as long as they can afford it.

In short, to each their own.