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Old 26th April 2010, 10:15   #76
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@aargee: Since you have already saved for two years specifically for the car, what you say makes sense.

Lok at it another way, a person like me with my own house (all paid for),children settled, enough savings for a rainy day, can afford a far more expensive ride than the thumbrule(s) suggest.

Another parameter which will come in is whether the repayments and depreciation are tax deductible. If so you can afford to go higher.

Also, as has been very correctly pointed out, in the worst case you should be in a position to wipe out the debt with your own liquid resources. The rest is a matter of accounting.
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Old 26th April 2010, 10:23   #77
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Quote:
Originally Posted by sgiitk View Post
can afford a far more expensive ride than the thumbrule(s) suggest.
Exactly, my point.
If it is not considered OT, I would rather save for few years waiting to buy my dream ride rather than paying someone for few years to realize my dream now. Oh!!! yes, and again, this thumb rule is for salaried people like us & not for corporate who can save tax.
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Old 26th April 2010, 10:29   #78
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1 question that I had in mind here:

Is is really that bad to buy a car on loan like many of us have suggested? Don't you think it is really hard for most of us to save enough to buy the car of our choice/requirement with cash?
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Old 26th April 2010, 10:35   #79
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I bought the Alto only out of my savings. I was sorely tempted to put in the 3 lacs and avail some loan to fund a bigger car, but decided not to. After all what I wanted was a car that would transport 3 or 4 people in reasonable comfort most frugally, and the Alto fit the bill perfectly. And I hate hypothecation in my RC book!

If my priorities change a few years later, may be I can upgrade by taking a loan. But even then I would prefer to fund 2/3 rd of the cost myself and avail 1/3 rd loan, which should not be more than my annual salary. This much amount I will be able to pay off to foreclose the loan at any given time.
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Old 26th April 2010, 10:36   #80
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I partially agree with the point expressed by many BHPians above that the guideline:
Car Cost <= Yearly Take Home Salary.
My contention is that it does not take into account:
1. Total cost of ownership per year
2. Age of individual

I would slightly modify this equation as follows:
Age between 20 and 30: 1 Lakh investment target per year
Total Cost of Ownership per Year (Car Cost + Interest Cost + Maintenance Cost + Fuel Bill) <= (Yearly Take Home Salary - 1 Lakh)
Age between 30 and 40: Min. 5 Lakh provisioning for Retirement Planning and Home EMI
Total Cost of Ownership per Year (Car Cost + Interest Cost + Maintenance Cost + Fuel Bill) <= (Yearly Take Home Salary - 5 Lakh)
Age between 40 and 60: 5 Lakh provisioning for Retirement Planning
Total Cost of Ownership per Year (Car Cost + Interest Cost + Maintenance Cost + Fuel Bill) <= (Yearly Take Home Salary - 5 Lakh)

This holds only for the salaried class for obvious reasons.
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Old 26th April 2010, 10:42   #81
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I would say, anything chalega - as long as there is a plan for how to manage retirement years, children's education & marriage, medical expenses at old age.

And a house of course. But I wouldn't hold myself back from buying a car till I own a house, because by then I may be too old and may get the car I want, but won't enjoy it the same way I would enjoy it now.

It's a balance
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Old 26th April 2010, 10:53   #82
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Quote:
Originally Posted by n.devdath View Post
1 question that I had in mind here:

Is is really that bad to buy a car on loan like many of us have suggested? Don't you think it is really hard for most of us to save enough to buy the car of our choice/requirement with cash?
Devdath, each and every individual has a different "risk profile". What I mean to say is some of us can take risks some of us can't. There is no way you can formulate one rule for everyone.

There are people who invest all their savings in Bank FD', Govt Securities, even if the rate of return is very low. Then there are people who don't mind the risks as long as there is a possibility of good returns.

If you fall in the first category (low risk profile) follow the thumb rule. The value of the car should be less than 50% your annula CTC and EMI should be less than 10% your net take home.

Two rules:
1 Never pick up a liability you are not comfortable with.
2 If the loan on the car you want to buy is beyond your risk taking abilities, don't buy it.

Taking a loan you are not comfortable with will lead to financial distress and buying a lesser (lower end, if you will) car would leave you dissatisfied. Wait for some time till your finances/income improves or you save up sufficient funds.

And in case you belong to the second category, like me, who don't mind taking risks, no rules apply to you. Do whatever you want, get whatever you want.

Last edited by Devil on Wheels : 26th April 2010 at 10:58.
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Old 26th April 2010, 10:54   #83
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Quote:
Originally Posted by n.devdath View Post
1 question that I had in mind here:

Is is really that bad to buy a car on loan like many of us have suggested? Don't you think it is really hard for most of us to save enough to buy the car of our choice/requirement with cash?

Let me take an example of a 5L car being bought using 2/3 options

B. All cash payment : Buyer pays 5L and gets the car
------------------------------------------------------
Advantages :

1. no EMIs
2. No interest payment
3. no future liability, not linked to any job assurance/guarantee etc
4. peace of mind

Disadvantages:

1. depletion in the cash reserves.
2. Loss of income from the 5L which could have been invested elsewhere
3. if Interest of 5L invested > interest on loan then coan would be more attactive.
4. value of the asset depreciates over time.
5. can not claim any IT rebates

B: Through Financing (Personal Loan): 80-85% of the OTR is being financed, vehicle is hypothicated with the financier
--------------------------------------------------------

Advantages:

1. need to finance only 15-20% of the OTR price need to be funded by the owner
2. EMI = f (loan amount, interest, tenure of the loan), payable every month
3. Ease of getting the funds needed for purchase
4. own funds would continue to earn returns if invested in right instruments
5. better option if Return on own investments >> cost of financing.

Disadvantages:

1. Finance based on credit rating of the individual
2. Vehicle is hypothicated with the financer
3. future liability, if future incomes are not assured, it could be risky
4. value of the asset reduces over time
5. Can not claim much of IT rebates


C: Financing through Hire-purchase (or corporate scheme): Car is financed by the corporate, owned by the corporate, provided to the user
-----------------------------------------------------------------------

Advantages:

1. No cash outflow for the owner/user while purchasing the vehicle
2. get better corportate discounts
3. No risk associated with loan EMIs
4. Own funds can earn better returns if invested well
5. Tax benefits as overall salary comes down during the period of car lease/hire-purchase
6. after the period is over the car needs to be bought by the user/owner at the stated value.

Dis-advantages:

1. part of the salary componenet is deducted against this perk
2. additional statutory mandated value is added to the salary and taxed accordingly
3. depending on the employer and one's position in the enterprise
4. can be used only by people who are enaged in reasonably large enterprises or professionals who are owners of commercial establishments.



The base line is simple
--------------------------
One must be able to afford a car and be able to live it.
His financial resources and future outlook does not support it, then there is no point in having a car in any of the above means.

As i said before, be the car bought using the heart or mind, one needs to pay through the nose. If the fun and benefits of buying a car is much more than the pain of paying for it, then it is justified.

Last edited by StarVegabond : 26th April 2010 at 10:58.
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Old 26th April 2010, 10:58   #84
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I empathize with this since this is probably the situation which most of us face. Only we can decide our own priorities.

Yes it is tough to save enough and then buy the car of one's choice. Mainly because this is the age of instant gratification and such is fuelled by loans and finance that are very easily available to one.

And no it is not a bad thing to take a loan and then buy the car of one's choice.Indeed, if we are honest, most of us, do exactly this.

However, while doing this one must keep one's other committments well in sight so that tempation does not cause irresponsible action.

Maybe one's annual salary/ earning can actually enable one to afford a top-end, bigger, prestige branded and much more stylish car, but the responsible question that one must ask one's self is whether such a car is really required or can one be equally happy with something which doesnt cause such a large outlay.

Worth keeping the thumb rules in mind as earlier shared or check with a trusted friend/ financial advisor before taking the plunge.

Quote:
Originally Posted by n.devdath View Post
1 question that I had in mind here:

Is is really that bad to buy a car on loan like many of us have suggested? Don't you think it is really hard for most of us to save enough to buy the car of our choice/requirement with cash?
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Old 26th April 2010, 11:09   #85
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I want to indicate one negative aspect of HIRE-PURCHASE, having experienced it first-hand:
It gives the employer a strong leverage over the employee and this can affect the employee's opportunities and career flexibility. Typically, the way Hire-Purchase is structured, premature exit can have a heavy penalty, more so than a typical loan situation.

Well, in my case, I said to the employer (ex), here's the cash, and there I go. But, not many people can do that all the time.
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Old 26th April 2010, 11:29   #86
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Well, I saved and scrimped for the better part of three years just to buy a car. In theory, I could have gone for something nice and small from the very first day itself.
But I decided that I would better own something outright at a later date than give in to temptation now.
I dont know what I am doing is right or wrong, but then again, I think I am better off not thinking about it now that I have started it.
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Old 26th April 2010, 11:30   #87
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Here's a very simple math
Plan A.
Consider the following example
Car Price = 425000
Finance percent = 80%, Finance amount = 340000
Tenure = 5 years or 60 months
Interest rate = 8%
EMI = 8900 (approx)

Plan B.
Now consider savings for 5 years for 8.5K on 8% returns that gives approximately 6.2 Lakhs.

So I would consider Plan B for the following reasons
1. Only commitment on savings for my beneficial
2. No threat on financials even with loss of job
3. 5 long years gives better competition on the segment; gives better features on the model
4. Gives me a peace of mind that the car does not belong to anyone else
5. Gives plenty of options
a. Buy the model of the car that I'm eyeing at + additional savings for accessories
b. Borrow a little more & get a different segment car altogether

Flip side? Long waiting period.

Quote:
Originally Posted by n.devdath View Post
Is is really that bad to buy a car on loan like many of us have suggested? Don't you think it is really hard for most of us to save enough to buy the car of our choice/requirement with cash?
IMO, buying a car with the above on Plan A is perfectly adviced when you're making money with the car (business). If not, it depends upon how much money you're borrowing, how much of EMI can you afford & what percent of the EMI plays on your take home. But borrowing money always has a risk & loans are considered bad in our culture; but with modern economics & trade practices, they're not bad, but certainly carry risk to an extend. So to what extend you're willing to afford is something that needs to be analyzed.

Last edited by aargee : 26th April 2010 at 11:36.
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Old 26th April 2010, 12:21   #88
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Different opinions on the post. Nice to hear various people.

We need to remember one thing, CAR IS NOT AN ASSET BUT ITS A BIG LIABILITY. You have to maintain it even if you are not using it. So when you plan to buy a car it should be easily affordable to you. Its always advisable to buy a car in cash but its not always possible. So EMI should be around 10-15% of your take home income. Also car should be affordable to you in case of maintenance. No point in buying Skoda, Honda, toyota if not affordable. There service bills are always bigger.

So always buy a car which is very easily affordable to you. Initial amount also, EMI & monthly maintenance also. No point in buying a car with high EMI & high maintenance and you are in position when not much is left for filling petrol
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Old 26th April 2010, 12:26   #89
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roy - well put.
every time one takes on a loan/ liability which feeds off one's future expectations, one is in some measure, compromising on one's freedom.
you have outlined one scenario where making a choice (in re employment etc) becomes difficult on account of one's outstandings.

even if one doesnt take a company car and one chooses to buy one's own car on Hire Purchase, one is still in the position where one is leveraging one's future earnings/ expectations in order to enjoy things in the "here and now".

The other point i agree with is that the "foreclosure" cost is an avoidable, wasteful expenditure.

This "instant gratification" is relatively new to our culture, having been a protected economy all these years. But the younger gen are taking to it like fish to water as can be seen all around us.



Quote:
Originally Posted by roy_libran View Post
I want to indicate one negative aspect of HIRE-PURCHASE, having experienced it first-hand:
It gives the employer a strong leverage over the employee and this can affect the employee's opportunities and career flexibility. Typically, the way Hire-Purchase is structured, premature exit can have a heavy penalty, more so than a typical loan situation.

Well, in my case, I said to the employer (ex), here's the cash, and there I go. But, not many people can do that all the time.
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Old 26th April 2010, 13:28   #90
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My personal view of a car - is it the most expensive of consumer goods one will ever purchase. Key here is the term "consumer goods". You cannot view it as a financial asset, it is an asset to you through its usefulness to your lifestyle.

So, being a financial sink hole, I would spend as much as I am comfortable with. Period. If the EMI on the car interferes with the rest of my life and all other financial plans, then it is not a purchase to make. Also, being financially conservative, I would always ensure that the difference in the book value and market value always be covered by cash available in case of a total loss.

Resale value is a bonus!
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