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Old 4th January 2006, 22:57   #1
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Exclamation How affordable are cars?

Many of us have always aspired to graduate out of our 2-wheelers or Maruti 800s for that ‘dream’ entry level mid-size car costing Rs. 5 L. Around a lac down payment and 8k per month doesn’t look like a big deal. And we go ahead and book that car. Many of us are not really aware of the ‘real’ cost. Wouldn’t it be nice to know the real cost before taking the plunge?

Let’s see the cost of ownership during the first year.
Cost of money (7.5%): Rs. 37,500
Cost of insurance: Rs. 15,000
Cost of fuel (assuming 10,000 km/yr, 12 kmpl, Rs.51/litre): Rs. 42,500
Depreciation (20% during year 1) Rs.100,000
Maintenance: Rs. 12,000 (1000 per month)
Cleaning Rs. 3000 (Rs.250 per month)
Self-driven (so no driver salary)
Total Rs.2,10,000 for the first year or Rs.17,500 per month

Now I am not saying Rs.17,500 per month is unaffordable. But, for someone who is buying a 5L car for the first time in his life, if he has to put expend Rs. 17.5 K pm towards a car, what should be his income?
I have nothing against someone who earns 30k net per month and expends 17.5k on the car if he and his family know it and it is a conscious decision.
I don’t suggest that people should never buy a car. But if they can intelligently combine train (first class/metro), cab and rickshaw, then they might save as much as 12k a month that can go into a mutual fund.
If buying a car is absolutely essential, then try a second hand. 3 year old at 50% the cost.

Cost of money (9%): Rs. 22,500
Cost of insurance: Rs. 7,500
Cost of fuel (assuming 10,000 km/yr, 10 kmpl, Rs.51/litre): Rs. 51,000
Depreciation (10% during year 1) Rs.25,000
Maintenance: Rs. 24,000 (2000 per month)
Cleaning Rs. 3000 (Rs.250 per month)
Self-driven (so no driver salary)
Total Rs.1,33,000 for the first year or Rs.11k per month

I feel 11k against 17.5k per month should not be looked upon as a ‘mere’ saving of Rs.6.5k. But looked from a point of view that whether paying 58% extra is worth the ‘smell’ of the new car and fewer hassles that come along with it.
I know many here are too rich to bother with the above calculations, but I hope many would understand the point I am trying to make.
I appreciate your feedback. All the above calculations and logic IMHO.

M
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Old 4th January 2006, 23:18   #2
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Interesting point.
With Interest rates so low and banks desperate for customers, it's been an enjoyable time for many customers who have upgraded to their dream sedan from a 2 wheeler or a hatchback (now i know why the accent sells in such large numbers - remember the genuine sedan ads?) but the fact is that a majority of them can't maintain one.
For eg- A person upgrading from an 800 would have bills amounting to twice if not thrice the amount of cash that was required for the 800.
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Old 5th January 2006, 04:01   #3
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Quote:
Originally Posted by Minardi
Many of us have always aspired to graduate out of our 2-wheelers or Maruti 800s for that ‘dream’ entry level mid-size car costing Rs. 5 L. Around a lac down payment and 8k per month doesn’t look like a big deal. And we go ahead and book that car. Many of us are not really aware of the ‘real’ cost. Wouldn’t it be nice to know the real cost before taking the plunge?
A person going from 2 wheelers to mid seizers is skipping 2 steps. He should better know what he is doing.
Also when we talk about the 'real' cost... we should not forget that the customer is already aware of most of the components of this cost as he has owned a vehicle before. Or even otherwise he will very well have a rough idea.

Quote:
Originally Posted by Minardi
I have nothing against someone who earns 30k net per month and expends 17.5k on the car if he and his family know it and it is a conscious decision.
that depends on some factors...
1) Is he only earning member?
2) Is he a single with no commitments?
3) Is his interest in buying a car limited to traveling from point A to B ..and some social status? Or he is an enthusiast!
I think 30k pm is not adequate to buy and maintain a 5L car. BUT on the other hand the person obviously expects his income to grow in the coming years.. and goes ahead with the 5L purchase!.. nothing wrong with it then.


Quote:
Originally Posted by Minardi
If buying a car is absolutely essential, then try a second hand. 3 year old at 50% the cost.
I don't agree... as this sounds like buying a car is a liability he has to pay... lesser he pays the better it is!
An old car might just be good for another 3 years. Though a new one could be good for 6-7 years... so the 50% cost didn't help much!

Quote:
Originally Posted by Minardi
But looked from a point of view that whether paying 58% extra is worth the ‘smell’ of the new car and fewer hassles that come along with it.
I think its not just the smell... its so much more than that.
just for example.. when we say more maintenance in old car don't we count the more frequent break-downs... also the time spent in all these maintenance activities…. The peace of mind???
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Old 5th January 2006, 10:36   #4
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Great points Minardi. You have only highlighted the fact that the cost of ownership is not restricted to those ridiculously low EMIs.

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Old 5th January 2006, 10:42   #5
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Unless one can claim depreciation I dont see much rational reason not to buy a 2 yr (20km driven) car. It usually saves 30% of the EMI.
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Old 5th January 2006, 10:48   #6
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A 5 lac car would simply put you off a million bucks in a span of 5 years. This is generally not realized by people who get into the lucrative financing deals on buying a new car, but that's a fact as documented by Minardi. Add to that the discounting mania, which further tempts the buyer.

Last edited by hawkeye : 5th January 2006 at 10:49.
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Old 5th January 2006, 10:57   #7
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quite true. From a pure economics/financial point of view, u can fetch umpteen citicabs or rick-rides for the price of owning a car, and then have spare cash leftover for shopping etc. Its the fun factor. convenience, and in our country, often the 'prestige' of owning a car which make it logical in the owner's eyes.
Similarly - lumpsum expenses - esp downpayments, insurance costs, don't really figure psychologically.
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Old 5th January 2006, 13:43   #8
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Quote:
Originally Posted by navin
Unless one can claim depreciation I dont see much rational reason not to buy a 2 yr (20km driven) car. It usually saves 30% of the EMI.
True... very true. I can not agree more, but for one problem. And that is a big 'but'. Until we have scrupulous dealers whose authenticity we can vouch for there is every likelyhood of a guy being taken in for a ride when he buys a pre-owned cars.

Who is going to vouch for the fact that the car which is being sold as otherwise a nice one has actually no major accident claims in its past? How many people know how to check the underbody/apron/seals etc... For that matter the meter tampering is so rampant here that it is difficult for the average bloke to tell that the car is actually 20000kms old. For all that you know it probably has its meter rotated backwards. Unlike US we do not have a fool proof methods of tracing a car's past history.

This is one big hindrance which forces people to buy new cars instead of looking for an immaculate 2 yr old car that could save a bundle.
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Old 5th January 2006, 15:59   #9
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It's a great topic!

I personally feel that a well maintained low mileage 1-2 year old car is nearly as good as a new car. Maintenance of car is very very important.

People buy new car mainly for following reasons:
[1] Status of owning a new car [fuelled by tempting low EMIs]
[2] Headache of not having huge unforeseen maintenance cost in 3-4 years
[3] Real love for the car

Many people don't consider the full calculation. They jump on the low EMI offer and later suffer. Even some of them can't continue anymore and the bank confiscates the car! Thus the old proverb goes cut your coat according to your clothes"

In India, both cars and petrol are very expensive! More expensive car you buy, more you lose in depreciation. Santro, Alto etc. hold better value in used car market than Esteem or Icon (as % of initial purchase cost).
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Old 5th January 2006, 17:20   #10
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This is a great topic, especially at the right time for me as I am looking at investing in a car. As someone said, Yes, I am taking two steps. From bike to a mid-size sedan.

Its not for the status or for the feel of the new car, but for the convenience and independence that it gives to me when it comes to commuting.

In chennai, its pours when it rains and it scorches when it shines. So ideally roof over the head is needed when you are out in the street.
Looking out for buses, trains or autos doesnt always work as the first two are time dependent and the last one is driver mood and stand dependent. Its a pain to go in chennai autos (except few ofcourse).

This is not to justify the rational behind buying "new" cars. But a rational behind buying cars as such. Buying a used car of a new one, comes from one's own confidence of getting a good deal.!!

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Old 5th January 2006, 19:17   #11
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Very nice post from Minardi. Always I had discussion with friends on economics of buying a car. Stats thrown by Minardi will help any person thinking about buying a new car.
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Old 5th January 2006, 19:37   #12
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Lightbulb I Wish I Was As Sensible As You...

I often joke at home telling my family that if I was really wise I would buy a Santro AT for use in a city like Chennai... Even, mentally, the car would be far less stressful (I like spotless/dentless cars), but no, I am so stupid, I like bigger cars with bigger engines... My Palio GTX bored me after just 5,000kms. and I sold it, so, imagine.

I agree with you on all points except the second hand car bit... There is a lot more to it.

After owning 9 cars in 9 years there are only two things I have to say to you:
1.
2. I wish my heart would let me be as sensible as you are... My mind is already with you.

Last edited by MrBoombastic : 5th January 2006 at 19:40.
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Old 5th January 2006, 21:10   #13
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Very good research done by Minardi.
However in the case of a self-employed or business person, there are many tax benefits to buying that car.
For one thing, insurance, petrol and garage bills are all deductible from the income before tax. Depreciation is also deductible. I will try and spell this out in greater detail tomorrow. In the menatime any accountants among us could tell us more?
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Old 5th January 2006, 23:56   #14
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Thx guys for your inputs.

Quote:
Originally Posted by SLK
we should not forget that the customer is already aware of most of the components of this cost as he has owned a vehicle before. Or even otherwise he will very well have a rough idea.
Even I hope the same SLK. I purchased my first vehicle an Esteem (1995). And before that the family had a Premier Padmini owned by my dad’s employers. When the insurance agent called to say that it is time to pay the second year insurance premium, only then did I realize that, irrespective of whether we use the car or not, we have to pay this premium every year. I don’t assume everyone would be like me, but then you never know human beings!

Quote:
Originally Posted by SLK
I don't agree... as this sounds like buying a car is a liability he has to pay... lesser he pays the better it is!
An old car might just be good for another 3 years. Though a new one could be good for 6-7 years... so the 50% cost didn't help much!
Even I used to think like that till I realized…
1. The new car is cost ineffective (value-wise) during the initial years, and its VFM increases every year, till it reaches a point where the hassles of the old car are so much that it is simply not worth to save money. Basically an inverted U graph, with it VFM maximizing at either year 3 or 4 or 5 depending on the value of money for you and your hassle-absorbing capacity.
2. It doesn’t make sense to justify the initial high costs by saying it pays you back in later years simply because there is no compulsion for you to necessarily take the initial years. Example: If the life a car is 6 years (after which the hassles are too much) then you can always buy a 3 year old car, use it for 3 years and repeat the same all over. In effect, you will be operating in the ‘high VFM’ band.

Quote:
Originally Posted by SLK
I think 30k pm is not adequate to buy and maintain a 5L car. BUT on the other hand the person obviously expects his income to grow in the coming years.. and goes ahead with the 5L purchase!.. nothing wrong with it then
That is a very common mistake which I would like buyers to be aware of. Today, if your 30k income is inadequate for a 5L car, don’t buy it and take the liability. You can always buy it later when your income grows.

Quote:
Originally Posted by SLK
I think its not just the smell... its so much more than that.
just for example.. when we say more maintenance in old car don't we count the more frequent break-downs... also the time spent in all these maintenance activities…. The peace of mind???
Let me give an example: Two guys ‘A’ and ‘B’ purchased identical Balenos on 1 Jan 2004. After 2 years, ‘B’ sold his car to ‘C’, whereas ‘A’ retained his car. Now wouldn’t the maintenance on ‘C’s car be exactly the same as that of ‘A’ or what would have been ‘B’s maintenance if he had retained the car? C’s status is exactly the same as that of ‘A’: Both are owners of 2-year old Balenos

My 2 points I would like to reiterate.
1. Think twice. Think umpteen number of times. Let your passion for cars not allow you to siphon money which should ideally have gone to your parents, your wife, your kids and their future. Remember whichever car you buy, the novelty wears off within 6-12 months. After that what remains will only be 4 more years of painful EMIs, which would just go endlessly and simply not end.
2. My personal solution for this is…go for a loan tenure of 2 years. If you can still afford the EMI, go ahead and buy the car, and ENJOY!

M
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Old 6th January 2006, 01:25   #15
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Quote:
Originally Posted by Minardi
1. Think twice. Think umpteen number of times. Let your passion for cars not allow you to siphon money which should ideally have gone to your parents, your wife, your kids and their future. Remember whichever car you buy, the novelty wears off within 6-12 months. After that what remains will only be 4 more years of painful EMIs, which would just go endlessly and simply not end.
Point Taken...
It might be a personal thing but I would not be at peace with a car that has been driven by someone else in its initial years... even if the car as on date looks well maintained/ driven... you never know when something crops up.

Quote:
Originally Posted by Minardi
2. My personal solution for this is…go for a loan tenure of 2 years. If you can still afford the EMI, go ahead and buy the car, and ENJOY!
Agreed... that’s what we have done till date!... probably it seems very obvious to me but not to all.

Now I have another theory....
I believe, buying a car is driven by what a person can afford... and not what a person desires.....
So if he can spend 5L... he'll either spend 5L on a new car or get an old 8L car. But ultimately he spends the maximum he can at that given point of time for a car.
Saying that he should have gone for a second hand 5L car.. car is not applicable.... as the deciding factor is always the money and not 'which car' he wants. (you always go for the maximum you can have).

So I am not disputing the point that if all goes well, a second hand car owned for a limited span of time would be cheaper. But if he goes for a second hand .. he'll spend the same principle amount on a higher segment car.
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