ARTICLE: The real cost of car ownership

[variozin]

This one seem like a baby question, but since I have never had used finance services or took loan for anything so dont have a clear idea.

Q. Is buying a car with full payment is better than taking loan, if the buyer is capable of ? Looking at EMI rates of 10~15% is it advisable to get financed than just pay the full amount from the pocket?

[msdivy]

Originally Posted by variozin

Q. Is buying a car with full payment is better than taking loan, if the buyer is capable of ? Looking at EMI rates of 10~15% is it advisable to get financed than just pay the full amount from the pocket?

If you can invest the full payment in some other venture and sure of earning considerably more than the interest charged by the bank for the auto loan, then you can go for auto loan. Otherwise make full payment and don't get into the hassles of auto loan & EMI tangle

[variozin]

thanks for the tip, so what does people usually do if they can afford the full amount.

Do you think its easy to find such an investment that could earn me more interest than that I will pay for car finance?

[msdivy]

Originally Posted by variozin

thanks for the tip, so what does people usually do if they can afford the full amount.

How about a poll for this?

Do you think its easy to find such an investment that could earn me more interest than that I will pay for car finance?

Depending on your budget, your risk-averseness, a good financial advisor might suggest a solution.

[variozin]

A poll would give interesting outcome...I will start one

[carboy]

Originally Posted by variozin

This one seem like a baby question, but since I have never had used finance services or took loan for anything so dont have a clear idea.

Q. Is buying a car with full payment is better than taking loan, if the buyer is capable of ? Looking at EMI rates of 10~15% is it advisable to get financed than just pay the full amount from the pocket?

This is a no-brainer in my opinion. One should almost never buy anything on a loan, except a home, if one can afford it. This opinion is irrespective of current interest rates. These are my reasons.

1) If you paying 10% for a loan & instead investing the same money in something which gives 8% it's obviously stupid.

2) If you paying 10% for a loan & instead investing the same money in something which gives 10% it's again not worth it if the 10% return
on investment is pre-tax.

3) If you are paying 10% for a loan & investing in something giving you
more than 10%, it probably may not be a very safe investment. If it
was a rock solid investment, why would the bank give you a loan? Won't
they rather invest their money in the same investment & make more
money. Maybe today your investment is making 15%, but 6 months down
the line, it may be making only 8% or even go at loss. The current bull
market for the last couple of years has lulled people into a sense that
stock market returns are assured. In the current market even if a
donkey is running a mutual fund. But this may not be true 1 year down
the line, or even 6 months down the line. Don't fool yourself into thinking
that you are smart enough to move your investment into something else
at the same time. Most professional investors aren't smart enough to
do this.
You get good returns on investments only if you take some risk, I am
not advising not to do it. I am just saying you should put your
money investment while taking a car loan at the same time.

Next question is if you can't afford to pay upfront, should you buy a
car on loan.

In my opinion, mostly no.
- If you can't afford a Swift Zxi, see if you can afford a Swift Lxi.
- If you can't afford a Swift Lxi, see if you can afford a Santro.
- See if a Maruti 800 is good enough for you.
- Buy a 2nd hand Swift Vxi.
- You don't need a stero in your car, unless you can afford it.
- You don't need automatic doors & windows, unless you can afford it.

If you can't afford anything, then see if you can travel in buses, trains,
autos for a year & save money to buy the car.

For most people car isn't a neccessity. If it isn't for you, don't
go for a loan.

Home Loans are slightly different beasts, so all this doesn't apply to
home loans.

[Sks_Biker]

Found this interesting article on the net:

Want to save on expenses? Sell your car!

Next time you go to work, leave your car at home and take a taxi instead. Better still, sell your car, you probably don’t need one with so many cabs around.

This sounds crazy, but, the numbers show that cost per kilometre of owning and running a typical car can work out uncomfortably close to the cost of travelling by taxi. Don’t believe? Here’s the evidence.

Ask anyone and he would be quick to tell you the excellent mileage he is getting from his car. Car companies keep bringing out advertisements touting fuel efficiency and the low running cost of their models. But, that’s not the right way to calculate the cost of owning a car.

The actual cost of ownership of a car works out to much more than you think. Before you fork out that princely sum – even if its on account of seemingly cheap loan – for that coveted piece of transportation, find out all about the total cost of ownership for a car. Total cost is a far cry from the running cost for a car.

The reliable way of finding out just how many kilometres your car returns for each litre of fuel is to tank up and then note the number of kilometres you cover in the amount of fuel in the next tankfill. People are very fond of comparing notes on this and feel good when they get a kilometre or so more than friends and neighbours. Known in popular parlance as "average", this is considered to be the estimate of the running cost for a car.

The running cost of the car should, in addition to the fuel cost, also include all consumables such as lubricants, engine and gear oils, and normal wear and tear. But, even including these elements does not lead us anywhere close to the total cost of ownership of a car.

Let’s try and understand this with the help of an example. Suppose you buy a car for Rs 4 lakh, and it gives you a mileage of 13-14 km per litre (kmpl) on petrol. That gives a fuel cost of roughly Rs 3.33 per kilometre.

For calculating the total running cost of the car, you need to also add the cost of other consumables like tyres (25 paise), oils (13 paise), others (12 paise) and the labour charges for regular service and minor repairs (50 paise). When we add up all these, the running cost of the car would be around Rs 4.33 per km.

However, even this is not close to the cost of ownership. When we look at the resale value of a car after five years, it is typically around 28-30% of the purchase price. For a car worth 4 lakh, this works out to a depreciation loss of around Rs 45,000 per annum.

If you have taken a loan, add another Rs 12,000 annually as the interest payment on your loan. Add to that the cost of insurance that would run close to another Rs 10,000 per annum. Let’s assume that you run your car an average of 10,000 km in a year. That adds Rs 6.7 to each kilometre you run your car. So the total cost would be close to Rs 11.03 per km! That is much more than the yellow-top taxi from the neighbourhood operator.

This is not the end, there are some more expenses that are yet to be accounted for. The cost hasn’t yet considered parking charges – which are only slated to grow over a period of time. Whether you visit a mall or an office complex, you need to park your car and pay the parking charges. Plus, add other charges that occur at least once in the ownership period of five years - expenses on battery replacement, AC service, interior cleaning, minor clutch/brake repair, etc. Parking and these once-in-five-years charges together add Rs 0.7 per km and total cost moves to Rs 11.73.

In addition to that, many people prefer to be driven around by a driver. This alone can add almost Rs 50,000 annually to your car running expenses; on our yearly distance travelled assumption of 10,000 km, this means another Rs 5 per km. Adding this, for 10,000 km, that equates into a total cost of ownership to over Rs 16.73 per km. The recently launched A/C taxis charge around Rs 15 per km.

Of course, the caveat is that the numbers can vary with the change in the price of the car and the kilometres travelled and how long the car is retained. We have taken a few assumptions that reflect the intra-city use of a car by a typical salaried owner. The broad message remains the same - owning one’s own car may not always be the best option.

So think again before going out to buy a car, if you plan to use it sparingly. It might be a better idea to rent rather than buy. Whats more, you will have the additional satisfaction of having done your civic duty of having kept another car off our congested roads and of being relatively more sensitive to the environment.

Source: Economic Times- 6/12/2007

Sure does make you think!

[sbasak]

If you calculate in pure moneytary benefits, you'll be far better off buy selling your car.

However, for us people, a car is a form of entertainment. You watch movies to have some fun - the car is just like that.

So, you can't always calculate the money lost on the car.

[carboy]

Originally Posted by Sks_Biker

So think again before going out to buy a car, if you plan to use it sparingly. It might be a better idea to rent rather than buy.
Source: Economic Times- 6/12/2007

I assume most people would know this. I didn't buy a car for
saving money !!! Duh. I bought it for convinience. I tried
all other modes of Bombay-Pune Travel - Volvo's, Taxis, Trains.
Didn't like any of them & finally bought a car.

Originally Posted by Sks_Biker

Whats more, you will have the additional satisfaction of having done your civic duty of having kept another car off our congested roads and of being relatively more sensitive to the environment.

Source: Economic Times- 6/12/2007

This is rather silly. If you are going to take a taxi instead of driving,
I don't see how that's keeping a car off the road & being more env-friendly.

[Nimz]

@carboy - thanks for that nice write up. Cleared my doubts.

It is generally believed that paying upfront attracts the IT guys to your door even though you may be salaried and Form 16s are in order. And was advised to take a loan. But after reading your article I guess I'll pay up.

But do IT guys really come knocking even when they ahve your PAN card details and know all your income etc.???

Nimz

[squarecut]

The economic times article quoted above was a silly article. The author arrived at the conclusion ( that hiring is better than buying) and then invented justifications to fit into that premise.

One buys a car for convenience, not for economy. Hiring a taxi is not economical or even practical all the time, like say in the midnight, or when it is raining, or when you have to go to a remote location etc.

There were many illogical calculations thrown in in the article to prove that hiring was better, but one should not compare owning with hiring, one should compare owning a car with leasing a car ( or taxi, if you will). And then one can find that leasing a taxi ( typically Indica) costs about Rs 15000 per month. Owning a car wll cost less than that per month, and it will have many other benefits over leasing a taxi that does not belong to you.

[DieselFan]

Absolutely. Car is bought for convinience. Period. Even during normal hours I struggle to get taxis here in Bangalore and pay a fortune to take me to Airport (Which is about 20 KM from my place and I end up paying min 350 Rs and the pre-paid charges 460 Rs.). Even economically it is not viable.

[jaganm]

This looks like another of those "filler" articles to me, must have been a slow news day!!!

[binoy_tharakan]

Originally Posted by gigy

An another thing in cost of ownership is the cost advantage one gains in buying a diesel car to petrol car. Lot of times it is argued that diesel is cheap hence go for a diesel car. I find that except indica the price difference between a petrol model and a diesel model of the same specifications, the diesel is far more costly, so considering you have already paid almost a lakh for cars like lancer, for a person to breakeven the price difference will take 30k to 80k depending on the brands. Then is it worth for people who wish to buy it for keeping it for 2 to 4 years or others who drive less??

Hi, I think we already have non-solved arguments about which is better Petrol vehicle or diesel. But if its about the ex-showroom price then there are many brands come up with similar pricing for Diesel and Petrol variants. Tata Safari another example. (Dicor and the petrol counter part has a difference less than 500Rs.

[Shant]

that we buy a car for convenience and not for saving. I am planning to buy one, so that I could take my parents out for visiting relatives, temples, dinners,shopping etc. Hiring autos and taxis may be feasible during the day. But in the evenings and nights especially when returning, hiring becomes a hassle with autos and taxis charging almost double. If it is raining the situation becomes more complex. Having a car relieves us from a lot of stress when planning family outings. So once we plan to buy a car, we need to revisit our budget and allocate sufficient funds