Who must read this article? People who want to know how much to spend on car purchase.
Who are these people? They are people who remain aware of their spending habits.
People who observe and analyse their spending habits tend to be wise-spenders.
They need not be spending less than others, but they tend to buy things differently.
What is the difference?
Their purchases, exhibit the following characteristics:
- It is always a value for money.
- It reflects the taste & personality of the buyer.
- Moreover, it also blends with their social status.
Generally, people are very passionate about their cars.
As a consequence, they tend to overspend on their car purchases.
In this article, we will see how one can pick a great car which specially reflects one’s “taste and personality”, and is also a “value for money”.
#1. “How to think” before spending on car purchase?
Yes, all right things had their roots in someone’s brain.
A car purchase generally deals with lot of money being spent.
So before spending it, better is to plan the purchase.
Car is not a small purchase. For an average person, possession of a car symbolises many things.
It talks about social status, taste, personality etc.
Had it been only a television set, purchasing would not have attracted the same overtones.
But Car is a Car, right?
I know you are understanding what I am trying to say… 🙂
Hence, it becomes extremely important to “think right” before spending on a car purchase.
What it means by thinking right?
One must not pick cars only on basis of “Brand Name” and “Price”.
There are other important parameters that must be considered before spending on car purchase.
- Pick the right car size.
- Value for money (New vs used car).
- Luxury or Affordable brand.
- Do a car research to build a taste.
- Pick right accessories.
- Think Future – Resale value.
- Think Maintenance.
- Buy car on Discounts.
- Car Financing.
#1.1 Pick the Right car size
I am sure, people do consider car size before their purchases.
But generally the “cost of car” dominates this decisions.
People low on budget, go for small cars. A decent budget, will attract bigger cars.
But this is not the right way to decide on car size.
A better approach will be to take this decision based on car usage.
Pricing should come next.
How many people will ride the car? Size of family.
What will be the use of car? Personal or commercial use.
For a nuclear family with 3/4 members, hatchback will do.
For a nuclear family with 3/4 members, but with teenagers or adults, sedan is more suitable.
A joint family may need a MUV.
People who also like offroading may opt for SUV.
These days, people who like sporty look also go for SUV-like built cars.
One must not spend extra on car purchase by picking a larger car than actually required.
#1.2 New vs used cars
This is one screening parameter that must be applied before finalising a car.
Generally when it comes to car purchase, people think only “New”.
But these days, the used car market has become more organised.
People may find good cars in used car market.
Moreover, a used car is a more “value for money”.
How we can say that? See this comparison:
|1||Car Model||S-Cross Zeta||S-Cross Zeta|
|3||Manual / AMT||Manual||Manual|
|4||Age||Latest||3 Years Old|
|5||Purchase Price (On Road)||Rs.||13,50,000||9,50,000|
|6||Car Loan Interest @9.5%||Rs.||5,03,408||3,54,250|
|7||Fuel Efficiency (Km/l)||20||16|
|8||Running per year (@ 30km/day)||7200||7200|
|9||Fuel Consumed / year||360||450|
|10||Fuel Cost (Diesel @Rs.70, 5 years)||Rs.||1,26,000||1,57,500|
|11||Insurance Premium Paid in 5 years||Rs.||75,000||78,750|
|12||Annual Maintenance Paid in 5 Years||Rs.||1,68,750||1,66,250|
|13||Resale Value after 5 Years||Rs.||-5,09,152||-3,37,216|
[Note: Car is held in possession for 5 years]
What does this table suggest?
For a new car:
On the date of purchase one will spend Rs.13,50,000.
Henceforth, one must spend Rs.6,193 per month for next 5 years.
For a used car:
On the date of purchase one will spend Rs.9,50,000.
Henceforth, one must spend Rs.7,120 per month for next 5 years.
Even though the monthly cost of operation of used car is higher, but over a period of 5 years, it is economical than a new car.
So if a person is ready to make a compromise on “newness” of a car, used car will be a better value for money.
By opting to purchase a used car, one can reduce the cost by almost 15-20%.
#1.3 Luxury vs other brands
I personally would like to touch upon this topic of car purchase. Why?
Because I have seen people comparing cars like BMW/Merc/Audi with Ford/Renault/Hyundai etc.
I personally think that they should not.
If they can afford the price tag, go for BMW/Merc/Audi/Volvo.
No need to compare.
These are premium cars, and people who can afford to drive these, should not bother about “value for money” etc.
Comparing technical specification of BMW with Renault, is not worth the effort.
Premium cars compliments the status of rich better.
Safety, performance and comfort features of premium cars is far better.
It is only a matter of how much extra one can pay for the below features:
- Brand name.
If one can pay, premium cars will always outclass other models.
Overall experience of driving a luxury car is incomparable.
But the point that must not be forgotten is one’s “social status”.
A decent SUV like XUV500 will cost Rs.20lakhs.
A similar SUV by BMWX1 will cost Rs.40 lakhs.
The cost difference is too high.
If one can afford BMW X1, there is no point comparing XUV500 with it.
In selecting a model from non-premium brands, it is always better to pick the established model.
One must avoid the models which has been launched for the first time in market.
By opting to purchase a non-premium car, one can reduce the cost by almost 40-50%.
#1.4 Do car research
If you are one who can afford premium cars, this itself is a big screener (Step #1.3).
After this step, just decide your price bracket and brand name.
Balance deliverables will be ensured by the car manufacturer.
But if you are like me, a lot of further research needs to be done.
The requirement is to buy a right car. What is a right car?
One which satisfies the following:
- Value for money.
- Matching Taste.
- Blends with the social status.
How to do it?
By doing simple car research. This also builds taste for a “perfect car”.
Where to start car research?
Car portals (Carwale etc) will help you to screen cars of your choice.
Use the following screening criteria:
- Size of car (#1.1).
- New or used (#1.2).
- Brand Names (#1.3).
- Fuel Type.
- Type of Transmission (Manual or Automatic).
- Minimum Engine power.
Once you have applied these screening parameters, note down names of all cars appearing in the list.
The next step will be to watch what experts say about these cars.
You can access reports of experts in youtube channels, Magazines like:
- Car & Bike (C&B).
- Autocar India.
- CarWow etc.
Another effective way of car research is to ask a friend who is driving the same model you want to buy.
It is also important to take test rides of as many cars as possible.
This helps the buyer to get a better understanding of the look and feel of the car.
Try to take the test ride on roads you drive more frequently (like home to office).
If idea is to spend on a car, one can make the purchasing memorable by doing a detailed car research.
But more importantly, an effective research will let you buy a perfect car, which you’ll love each day.
#1.5 Pick right car accessories
Every additional items purchased with the car comes at an extra cost.
In most cases, these accessories prove expensive for the buyer.
These accessories are never value for money till their use is justified.
What type of accessories are generally offered with the car?
- Seat cover.
- Infotainment & Navigation system.
- Parking assistance.
- Safety lock.
- Baby safety gear.
- Corrosion treatment.
- Auto anti glare mirrors.
- Additional airbags.
- Head support etc.
Generally, it is better to buy the “basic model” of your preferred car.
These days, even the basic model of car is equipped with features.
Buying accessories which comes factory-fitted, are more economical.
One must try to avoid spending extra on accessories as they are generally over priced.
Even the logic says, when focus is on car purchase, why to spill extra money on accessories, right?
#1.6 Think Future- Resale value
All cars age with time. Their market price depreciates.
In Financial Term, the aging of car is called “depreciation”.
As a rule of thumb, as soon as the car moves out of the showroom, its market value depreciates by 15-20%.
Henceforth, with each passing year, the value of car will fall by 15%.
Means, by end of fifth year, the market price of car is reduced to almost 40% or lower.
But not all cars depreciate so fast.
Indian brands like Tata Motors, Maruti depreciates fastest. It means, less people like to buy a used Tata or Maruti cars.
Japanese, Korean and American brands find more number of buyers for their used cars.
European cars are most preferred brands in used car market. Hence they depreciates slowly.
The color of car also plays a small role in value depreciation.
White and black cars gets more buyers. Hence they fetch better price in used car market.
#1.7 Think Car Maintenance (Check affordability..???)
In India, people spend 1.5% of their annual income on car maintenance.
This parameter also works as an affordability check. How?
We will see here…
Suppose one want to buy a Audi Q3 (Cost: Rs.40 lakhs)
On an average, annual maintenance of Audi Q3 can cost the buyer around Rs.80,000 per annum (2.5% of cost of car).
Suppose ones take home salary is Rs.2,00,000 each month.
How much this person will spend on annual maintenance (compared to his annual salary) had he bought Audi Q3 ?
= Rs.80,000/24,00,000 = 3.33% (this must be around 1.5%)
This ratio proves that, the person will overspend by buying a Audi.
Let’s do a back calculation for this person.
- Annual Cash in hand: Rs.24 Lakhs.
- Preferred Car Maintenance Cost (1.5%): Rs.36,000 (24L x 1.5%).
- Car Value (@2.5%): ~Rs.15,00,000 (36,000/2.5%).
What does it mean?
A person who earns around Rs.2 lakhs per month, shall buy a car of Rs.15 lakhs.
#1.8 Buy new car on discounts.
It is always better to buy cars on discounted rates.
One way to do it, is discussed in #1.2 (used vs new car).
But if one has decided to buy a brand new car, when to buy? Which part of the year?
To boost sales, car dealers offer discounts.
Best time to buy cars in India is between December & January.
Dealers try to get rid of last year models in these months.
Hence December/January could be a best time to buy new cars.
One can also compare price of same car offered by different dealers.
Due to competition one dealer may give better on road pricing than the other.
Every penny saved in buying a new car is worth the effort.
Always remember, car is not an asset, it is a liability.
#1.9 Car Financing…
Not everyone can buy car from savings.
Some outside financing may be required.
Banks can provide 85% of car value as loan. Balance 15% must be self contribution.
But a better value for money will be:
- 50% Bank Loan.
- 50% Self contribution.
If one does not have 50% savings to buy the car, it means it is not the time to buy.
Accumulate savings (50%), and then buy the car.
It is necessary to note two things about cars.
- People love to have a nice car.
- But car is also a liability.
Hence it is only prudent to buy a car which is efficient for our pocket, and also match our bare minimum requirements.
If the question is, how much to spend on car purchase? A right answer will be, depending on ones affordability.
But this does not mean that one must buy only Tata Nano.
To do one’s affordability calculation, please look at #1.7.
Buying a right car is an important part of one’s personal finance management. Why?
Because car doesn’t come cheap.
Moreover, cars also has a recurring operating cost. This is why it is called a liability.
I hope after reading this article, you will get some idea about how much to spend on car purchase.