Buying a car by taking a loan? You must first try to figure out whether you will really be able to afford that car or not.
Using public transport is a great way for commuters to save money while helping to improve the environment. However, if you are keen on commuting by your own vehicle, particularly in view of the Covid-19 pandemic, nation’s pathetic public transport system or simply because the new car of your neighbour has caught your eye, you must first try to figure out whether you will really be able to afford that car or not.
For, you must not determine your affordability just by looking at the EMI of any car. The fact is the EMI is just one small part of the total cost of car ownership, and additional expenses may even be bigger than that. To determine your affordability, therefore, you need to find out the real cost of owing a car, that is, the cost needed to upgrade from public transport to a car.
But how to determine the real cost of owing a car? We need to know that vehicle expenses fall into 3 categories. First is one-time cost. Second is ongoing cost, and the third is emergency cost. Purchase price, registration fee, sales tax among others are the one-time costs of any vehicle. Ongoing costs include insurance, routine maintenance, fuel, cost of driver and depreciation, among others. Costs like towing and repairs fall into the category of emergency costs. All these costs should be taken into account while arriving at the real cost of vehicle ownership.
Suppose for a Rs 8.5-lakh car, you are planning to take a Rs 7-lakh car loan @ 7.5% per annum for 5 years. In this case the EMI of your car will work out to around Rs 14,027 (assuming all other charges to be zero).Then suppose your monthly expenses on fuel, parking and driver are likely to be Rs 3,000, Rs 1,500 and Rs 10,000, respectively. Add to these the monthly average of maintenance and depreciation, and the sum total of all these expenses will be around Rs 29,000. Again suppose you spend Rs 10,000 on public transport (like auto). So the cost to upgrade to car from public transport in this case will be Rs19,000 per month, that is the difference between the total monthly cost associated with owning a car and using public transport.
No doubt, the cost of car ownership will go down in case you decide to increase the tenure of the loan. For instance, if the tenure is increased to, say, 7 years, the EMI will come down by Rs 3,290 a month to Rs 10,737, but your total interest payable will increase by Rs 60,297 to Rs 2,01,891.
Likewise, if you decide to drive on your own, you will again save on the driver’s cost. Still the cost of owing a car will be substantial compared to commuting by public transport, and this cost will increase further if you plan to buy a costlier car. But that depends on your affordability.
The other factor is the distance to be travelled daily. Sometimes the distance to be travelled is so long that you may prefer travelling in your own car. Modes and frequency of public transport is also important. Thus, if you are living in a remote area where there is shortage of public transport, you might put in extra up-gradation cost for your comfort.
Whatever be the case, financial experts say that buying a car is one of the most significant moments of our lives. Hence, “one must exercise caution before going ahead with this big-ticket purchase. If your income channels have not been impacted by the pandemic, and you’re planning to buy a car on loan, ensure your total debt commitments (i.e. your car loan EMI+ other loan EMIs put together) do not exceed 40% of your monthly household income. You can do so by not breaching your budget, or going for a cost-effective vehicle or even a pre-used car. Such pragmatic steps would go a long way to ensure you continue enjoying the car without exerting undue pressure on your finances,” says Adhil Shetty, CEO, BankBazaar.com.
That being said, you must realise cars are depreciating assets which involve a number of periodic expenses apart from EMIs, like insurance premiums, fuel, maintenance and parking charges which could be both fixed or variable in nature.
To understand the total monthly expenses of owning a car, let’s again take an example. We’ve assumed a Rs 15-lakh petrol car purchased with a 10% car loan covering 80% LTV for 7 years. Do note the actual variable figures could vastly differ based on your lifestyle, and the usage, type and condition of your car among other considerations like applicable fuel prices, parking and maintenance costs, etc.
And we are yet to include other costs such as the cost of depreciation and driver’s salary, if you want to hire a driver!