ARTICLE: YOUR 5 year old car : Keep, Upgrade or Swap?

[djanurag]

Originally Posted by GTO

Indians generally trade / upgrade their cars after only 5 years of ownership. Here is a classic situation : Sell a 5 year old WagonR for that shiny new Swift / Getz / Vista. Or an '03 Honda City for a new Civic / Octavia / Corolla. Or an '03 Octavia for a new Laura / Accord.

Either you will buy a new car from the same segment, or upgrade to a higher segment. The latter seems to be the more popular option amongst BHPians. We were curious to know the absolute financial implications and ran some numbers on the excel. I have used a typical C Segment sedan as the basis of calculation. For segments lower or higher, simply equalize the appropriate numbers.

What actually makes financial sense? Should you retain your existing car for another 3 - 5 years or trade up toward a new car?

Considerations

• Since we are assuming that a 5 year old car is already on hand, I am going to calculate the cost of ownership from the 6th year to the 10th.

• A 5 year old car in India would have typically covered about 60,000 – 80,000 kms. Translated, it still has a good amount of useful healthy life in it. A well-maintained modern C segment sedan will easily deliver reliable service of atleast 1,50,000 kms. An immaculately maintained C-segment will go upto 2,00,000 kms or over.

• The loan is entirely paid off (Don’t you just love the non-EMI times of your life!).

Hi though i am posting for the first time i have been a avid memeber of team BHP. Kudos to all the members for that.
Speaking on the topic which is quoted on top i'm facing a similar tornado in my mind for over a month now. I drive a ford Ikon 1.3 the car has been giving me a lot of trouble of late such as ac compressor, front arm bush, suspensions etc. i have already spent 30 grands on it but it still doesnt feel the same. I am contenplating on an Accent executive which is a great buy and thts my budget too. need some serious advice on what to do as i am getting only 1 lac for my Ikon. Suggest????

[GTO]

Ajanurag, what year & how many kms has your Ikon covered?

[djanurag]

Originally Posted by GTO

Ajanurag, what year & how many kms has your Ikon covered?

Hey,

The car is a 2003 model and has done 36000 kms.

[DieselFan]

Originally Posted by djanurag

Hi though i am posting for the first time i have been a avid memeber of team BHP. Kudos to all the members for that.
Speaking on the topic which is quoted on top i'm facing a similar tornado in my mind for over a month now. I drive a ford Ikon 1.3 the car has been giving me a lot of trouble of late such as ac compressor, front arm bush, suspensions etc. i have already spent 30 grands on it but it still doesnt feel the same. I am contenplating on an Accent executive which is a great buy and thts my budget too. need some serious advice on what to do as i am getting only 1 lac for my Ikon. Suggest????

Originally Posted by djanurag

Hey,

The car is a 2003 model and has done 36000 kms.

Anurag,

I am surprised at the price being quoted for your car. I do understand that Ford has low resale value but not this low. 1Lakh is too low for your car which has run on 36000 kms. My suggestion is to go to a good Non ford workshop and get the car checked and serviced hence forth. I know TVS has workshops all over Bangalore which handle Ford cars at much cheaper rate. Going for a new Accent is not advisable at all. Accent is already reaching End of Life and is an outdated car. Look at some new cars that are planned to come in 2010, VW-Polo is a good car that is planned for 2010. Also looka t some of the Hatches that are available today - Punto and Swift are two good ones. I have Swift Diesel with me and driven for 48000 kms in last 2.5 years and have not spent more than 15000 on servicing and another 15000 on tyres.

[romeomidhun]

Originally Posted by GTO

Option ONE : Retain your existing car

• Rs. 4,25,000 : The resale value of your 5 year old C-segment sedan (e.g. Honda City) as of today.
• Rs. 20,000 : Averaged maintenance cost per year. Thus, you would spend a total of a lac over the next 5 years on a timing belt replacement, suspension overhaul, new brake pads and other required items.
• Rs, 35,000 : Total cost of insurance premiums for the next 5 years.
• Rs. 1,50,000 : Resale cost (realistic) of your 10 year old C-segment sedan in year 2013.

Thus, if you retain your existing sedan for the next 5 years, you will incur a total ownership cost of Rs. 4,10,000 OR Rs. 82,000 p.a.

Option TWO : Upgrade to a C+ segment car

• Rs. 12,50,000 : Cost of a new Honda Civic or equivalent sedan.
• Rs. 4,25,000 : Proceeds from the sale of your existing sedan used as down-payment toward the new car.
• Rs. 20,000 : Approximate EMI per month for 8.25 lacs on a 5 year term.
• Rs. 6,000 : Averaged maintenance cost per year.
• Rs. 1,20,000 : Total cost of insurance premiums for the next 5 years.
• Rs. 6,20,000 : Realistic resale of your new C+ sedan in year 2013.

Thus, if you upgrade from a C-segment sedan to a C+ segmenter, you will spend a total of Rs. 11,55,000 over the next 5 years. OR 2,31,000 per year.

But that’s not the entire picture, is it? What we have not calculated yet is the opportunity cost of the Rs. 20,000 per month that you are blowing away toward the new car’s EMI. If you don’t upgrade, that money can instead be invested. Even if reasonably invested, the saved Rs. 20,000 per month will become a whopping 15 lakh rupees at the end of 2013!

Net net, retaining your current 5 year old sedan (over a 12.5 lakh sedan upgrade) will make you richer by 22.5 lakh rupees over the next 5 years! That’s an earning of Rs. 4,50,000 per year. OR Rs. 37,500 a month.

GTO, this calculation is somewhat wrong, I think. Let me explain:

First part is OK, keeping the old car will cost you Rs 4,10,000 extra.

Second part is also OK, the new car will cost you Rs 11,55,000 extra.

But the third part is wrong. We cannot consider the entire amount of Rs 15,00,000, but only the interest amount of Rs 3,00,000 can be considered, because the principal amount of Rs 12,00,000 (= 20,000 x 12 x 5) is already considered while calculating the expense for the new car.

Rs 15,00,000 - 12,00,000 = 3,00,000.

So the total extra cost for a new car over the used one is:
11,55,000 - 4,10,000 - 3,00,000 = Rs 10,45,000 only.

Am I wrong somewhere?

[romeomidhun]

Originally Posted by romeomidhun

So the total extra cost for a new car over the used one is:
11,55,000 - 4,10,000 - 3,00,000 = Rs 10,45,000 only.

Sorry, that was a typo;

11,55,000 - 4,10,000 + 3,00,000 = Rs 10,45,000.

[alphavictor]

Originally Posted by bblost

I guess the most important thing then is to buy a car, which you truly truly love and can enjoy for a real long time.
Find the best match in terms of mileage, speed, power, handling and everything else.
You will be keeping it for a real long time.

That's what I did! I've loved the Esteem since forever and when I finally could afford it, went for a 78k kms, 2001 VX in excellent condition & loaded it up with goodies. Done 17K km in less than a year! Ans I don't plan to sell it for another couple years (at the very least). Why would I? I get 15 kmpl in city driving, good pick-up & handling, big enough for me, wife & parents.... In short, all I need.

[GTO]

Originally Posted by romeomidhun

Second part is also OK, the new car will cost you Rs 11,55,000 extra.

So the total extra cost for a new car over the used one is:
11,55,000 - 4,10,000 - 3,00,000 = Rs 10,45,000 only.

Now you have me confused man! The first part of your post agrees with my new car cost of 11.55 lakhs, later in the post you say its 10.45 lakhs. Which one?

Rationale behind the 22.5 lakh figure : Instead of spending 11.55 lakhs in incremental costs over the next 5 years, you have saved 7.45 lakhs (cost of upgrade - retaining the same car at a cost of 4.1 lakhs) and invested the Rs. 20,000 monthly EMI instead. Even a conservative market instrument will mature to 15 lakhs (after investing 20,000 a month for 60 months). Thus, 15 + 7.45 = 22.45!

[Vampirelord]

I have a 2002 Maruti Zen petrol, done 70,000 kms, planning to upgrade to a second hand Honda City V-tec, which I'm probably going to end up modifying a bit. The Zen is still in a great condition and since I haven't had any trouble whatsoever with it so far and runs just as smooth, am having second thoughts. The only problem I'll have to deal with if I don't sell it is, parking space. Also, theres no guarantee that the Honda City will be just as good as my Zen. Any suggestions?

[bhunu AMG]

hello vampirelord,for maintanance ..yes you have to spend more for honda city but everything else like ride,comfort,image or take any thing there city scores.And if you are going to use ur zen for next two to three years then it's re sale will go drastically being a stopped model of maruti.regards

[drpullockaran]

If not for poor maths I would have been an automobile engineer so forgive my inquiry on the subject.
In the calculation should we not also include the depreciation that we will be claiming from the income tax department for the new car up to the year 2013 or is that a given in the equation.

I have been forced to downgrade from the Palio GTX to the Chevy Cruze due to extraneous reasons but the chartered accountant is of the view that its cheaper for me to buy the newer car rather than keep my beloved GTX when taking into the consideration the amount of depreciation that I am going to claim over 5 years.
Enlighten me please. Is the chartered accountant wrong in his advice?

[Vampirelord]

Originally Posted by bhunu AMG

hello vampirelord,for maintanance ..yes you have to spend more for honda city but everything else like ride,comfort,image or take any thing there city scores.And if you are going to use ur zen for next two to three years then it's re sale will go drastically being a stopped model of maruti.regards

Thanks for the advice Bhunu , I am planning to buy the Honda this January, any idea on how much I could spend for a good second hand V-tec instead of being taken for a ride for an old dump. Any specific model I should look for and other things I should be careful about?

[romeomidhun]

Originally Posted by GTO

Now you have me confused man! The first part of your post agrees with my new car cost of 11.55 lakhs, later in the post you say its 10.45 lakhs. Which one?

the amount 11.55 lakhs is the cost of the new car, and 10.45 lakhs is the saving if the old car is retained.

[sierrakamat]

Originally Posted by drpullockaran

If not for poor maths I would have been an automobile engineer so forgive my inquiry on the subject.
In the calculation should we not also include the depreciation that we will be claiming from the income tax department for the new car up to the year 2013 or is that a given in the equation.

I have been forced to downgrade from the Palio GTX to the Chevy Cruze due to extraneous reasons but the chartered accountant is of the view that its cheaper for me to buy the newer car rather than keep my beloved GTX when taking into the consideration the amount of depreciation that I am going to claim over 5 years.
Enlighten me please. Is the chartered accountant wrong in his advice?

didnt you ask your ca whether you could keep both and claim double depreciation that way everyone would have been happy

[GTO]

Originally Posted by Vampirelord

I have a 2002 Maruti Zen petrol, done 70,000 kms, planning to upgrade to a second hand Honda City V-tec, which I'm probably going to end up modifying a bit.

Lateral upgrades are a highly recommended option (vis a vis buying new). If you are going to sell your perfectly running car, best to buy used. Your losses in depreciation are well negated by going used for the next purchase.

Originally Posted by drpullockaran

In the calculation should we not also include the depreciation that we will be claiming from the income tax department for the new car up to the year 2013 or is that a given in the equation.

Certainly yes. It has been mentioned that business owners / corporates must factor in depreciation benefits to the calculations in my opening post. Note however, that the actual benefit to you is not the entire depreciation claimed. It is 30 - 35% (your income tax bracket) of the total depreciation. As an example, say on a 10 lakh rupee Cruze, you claim Rs. 2.0 lakhs of depreciation in the first year. The actual benefit is not the entire 2.0 lakh rupees, rather Rs. 60,000. Simply because if you hadn't claimed depreciation, that amount would be taxed @ 30%. The balance 1.4 lakhs would still be your after-profit $$$.