For many of us, buying a car is no longer a luxury, but a necessity. And unlike in the 80s when the options were very few, now there are a lot of options to choose from, starting from entry-level cars to luxury automobiles.
But when it comes to buying car, most of us do not factor in the costs involved and often end up buying our car on an emotional whim.
Says Arijt Sen, a Securities and Exchange Board of India (Sebi)-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm: “When it comes to buying your dream car, you typically need to consider your affordability. When it’s about your dream car, it’s very common to get swayed, as your emotion is involved to a great extent. While factoring in the cost of ownership, one must consider that it’s beyond just the fuel cost and equated monthly instalments (EMIs) if taken on a loan.”
So, it is crucial to bear in mind to always factor in the on-road price of the car. The ultimate cost includes various expenses, including road tax, registration charges, and insurance premiums, making it typically 15-20 per cent higher than the ex-showroom price of the car.
So, here are some basics you should keep in mind while buying a car.
Avoid allocating over half of your yearly earnings to a new car purchase. For instance, if your annual income is Rs 10 lakh, it is advisable to limit your budget to approximately Rs 5 lakh, taking into account the car’s on-road price. The person at the showroom will of course ask you to stretch your budget a bit, but it is important not to get carried away.
It’s important to remember that a car is a depreciating commodity. While deciding on your budget, consider your ongoing and upcoming family commitments. It requires a long-term planning. In a way, one can create a sizable fund for a downpayment if it is included in the financial plan well in advance.
Taking a car loan is not generally healthy as it puts additional pressure on your monthly cash flow. However, as it is also not possible to shell out the entire amount from one’s pocket, so a loan becomes a necessity at times.
Says Sen: “The fund for a downpayment should be arranged in such a manner that it doesn’t adversely affect your other financial goals in life. If at all a loan is required to be taken, the cash flow needs to be thoroughly assessed. If ongoing EMIs towards home loan, personal loan or education loan exist, then one needs to calculate the outflow towards car EMIs among other family expenses.”
Shweta Jain, founder of Investography says that the downpayment of the car should be done keeping in mind what one is comfortable paying for initially, but it should be at least 20-40 per cent of the car’s price.
Tightrope walking with a huge EMI burden can prove to be stressful. Too much liability to fulfil a dream is also not always suitable for a family.
So, as a practice, make sure that the EMI is a figure that will allow you to also save and invest any surplus left towards your other life goals after meeting your family’s expenses.
“The EMI should be less than 25 per cent of your overall expenses, else you will end up with a higher load on your finances,” says Jain.
If you need to compromise your savings and investments towards future needs just to cope with the EMI burden, such a scenario is also not recommended, Says Jain.
Lastly, also note that being eligible for a loan doesn’t imply affordability. Exceeding your car budget resembles negative compounding. So, one should not spend more than what is necessary. A Rs 25 lakh loan doesn’t equate to a Rs 25 lakh car purchase, as a higher loan amount will incur more money in interest payment.
