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

[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!).

[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]

Shocked? Yup, me & Ajmat were too. Remember, the cost of a new car is not the EMI alone. The long list consists of depreciation, taxes, higher insurance premiums, loan interest costs and more. Even if you are a business owner and can avail of depreciation benefits, the numbers still don’t justify an upgrade to a higher sedan. On the other hand, you can consider upgrading sensibly. Plenty of used (and excellent) Accords, Mondeos & RS' in the 6 - 7.5 lakh price band. Lateral upgrades do give you immense bang for the buck.

This is all the more reason to maintain your car well. Not only will it last a longer period and give you reliable service, but it will fetch you a better resale too. Now you know why I am known to use my cars till they drop apart.

[phamilyman]

Save the actual numbers, but isnt this common sense?

I thought the bulk of the junta upgraded, not for the numbers, but for the heart - for pleasure - anup saab can add in here.

Plus if you're a delhi walaah, for 'status'

[appuchan]

Good math GTO!

I too upgraded my Santro to a Verna after about 6 years. But I still have and drive my Santro more! I think, if we own a car for more than required time, an "emotional bond" starts to develop, which is one of the reason why I dont want to let go my 7+ yr old Santro.

[aerohit]

I was wondering - Will this activity not increase the demand for used cars, hence increase the price, which will later be close to almost buying the same car as New.

Also, will this activity not reduce the sale of New cars by the manufacturer?

This is hypothetical, but whatever, he who wants to buy a new car will always buy one - right?

But you did made an intelligent point, like an Indian. In the US for example, people may be trading cars every 2 years - which i think is a waste of metal and natural resources and unnessesary over consumption. Why dump a car when it is already running good!

[tsk1979]

Given a chance we would all love to keep our old stuff forever. Clothtes, cars, utensils.
where do we stop.
Maintain your jeans well, and don't buy jeans after you are 20.
Don't gain weight, so you can fit in old clothes.

But upgradation is not just a financial consideration. A car is not a mutual fund or a stock which is just there for money, a car is a utility, just like clothes.
Lots of other factors like comfort, image, status, safety reliability.

You may make 22 lakhs by not selling old car, but what about safety, comfort reliability? Can the value of these be judged in money. If money was the only consideration then the best choice is to sell your honda city for 4 lakhs and buy a M800 instead of a civic.

[DKG]

Well GTO here's some more to add to your logic. Two of my cars are 69 and 71 years old and guess what - they are appreciating in value big time !!

[shankar.balan]

This is interesting, since I experienced this dilemma 5 months ago. I was advised as follows by my CFO when I asked him about this, seeking his help as a Finance Professional:

1.Typically people/ companies take 5 year loans to buy brand new cars.
2.On a 5 year loan, the break-even point comes at about 3 years into the loan.
3.This is because the outstanding principal plus interest will be less than 50% of the loan originally taken - meaning one would, over 3 years of servicing the EMI's, have paid back more than 50% of the loan.
4.At this point, the vehicle is also only 3 years old and going by today's pressures etc, it probably would have done only about 25000-30000 km max - assuming about 10000km per annum - 800-850 km running per month,mostly in the city and would be typical in the case of most working people.
5.Thus, the existing 3 year old vehicle will attract a good re-sale value which, even after paying off/ foreclosing the remainder loan with the bank, still leaves one with a good deal of money to put down as a downpayment for the next vehicle.
6.Maybe one may wish at this time, to add more to the down-payment because one can assume that in these last 3 years, one would have developed / evolved in terms of one's customer preferences/ expectations as well as moved up in social-status, financial strength etc.
7.Therefore, typically, one would tend to upgrade to the next level/ class of vehicle, provided of course, one is mentally comfortable with servicing the higher EMI and sees value in the upgrade.
8.One more point in favour of this method is that one is constantly upgrading one's self to newer and better technology/ lower emissions/ higher Fuel Efficiency maybe and generally better, newer vehicles, rather than sticking with the old ones.
9.The flip-side of all this consumption-led behaviour is that as long as one is working and earning, one will be constantly consuming and thus, will be servicing some kind of EMI or other - on the "never-never" or the "play-now-pay-later-plan" to use a couple of euphemisms!!

Originally Posted by GTO

Indians generally trade / upgrade their cars after 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 most popular on the forum. I was curious to know the absolute financial implications and ran some numbers on excel. I have used a typical C Segment sedan as the basis of calculation. For segments lower or higher, just equalize the appropriate numbers.

What actually makes financial sense? Should you retain your existing car for another 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 a reliable service of atleast 1,50,000 kms. An immaculately maintained C-segment will go upto 2,00,000 or over.
• The loan is entirely paid off (Don’t you just love the non-EMI times of your life!)

[bblost]

I posed the same question in the following thread.
http://www.team-bhp.com/forum/hatchb...gon-r-mjd.html (Do I trade in the Wagon R for a MJD)

IMHO I think it does make sense for the scenario I have described.
Exchanging the Wagon R for the MJD or the Vista esp so in the case of the Vista.

[GTO]

Originally Posted by phamilyman

Save the actual numbers, but isnt this common sense?

We overlook the obvious much too often, phamilyman. Would you not agree?

Originally Posted by aerohit

I was wondering - Will this activity not increase the demand for used cars, hence increase the price, which will later be close to almost buying the same car as New.

Well, not everyone has to think sensibly, do they? I don't suppose this would become a mass phenomena. But there are a lot of people who follow this practice (moi included )

Originally Posted by tsk1979

Given a chance we would all love to keep our old stuff forever. Clothtes, cars, utensils.
where do we stop.
Maintain your jeans well, and don't buy jeans after you are 20.
Don't gain weight, so you can fit in old clothes. But upgradation is not just a financial consideration.

TSK, consider that a car entails the second highest outflow for an Indian (after a house). And the fact that a car is a depreciating asset. I will correct you on the fact that upgradation is, indeed, a financial consideration. If it wern't, all of us would be driving around in an S-Class.

A car is not a mutual fund or a stock which is just there for money, a car is a utility, just like clothes.

AHA! Thats my point. If the car is just a utility, pray tell me what additional utility is a 12.5 lakh Civic giving me over my existing Honda City? By definition, the utility value of a car would be its ability in getting you from Pt. A to Pt. B.

You may make 22 lakhs by not selling old car, but what about safety, comfort reliability?

A well-maintained sedan will enjoy supreme reliability for atleast 1.5 lakh kms.

If money was the only consideration then the best choice is to sell your honda city for 4 lakhs and buy a M800 instead of a civic.

You are missing the point. It's not about money being the only consideration. If it was, why buy even an 800? Get a motorcycle or better yet, use the bus.

The question is of differential value. Is a new car giving me 22 lakh rupees worth of additional benefits over the next 5 years? I don't think so. Ask the guy who owns only one 7 lakh sedan? Is 40,000 per month a small amount to his house? No ways.

Remember, the rich got there by sensibly using their money, not spending it all out. I am certainly not saying it's foolish to upgrade to a higher segment after 5 years (even though I don't!). To each his own. However, we must be aware of the financial implications of doing so. The math is there and you really can't argue with that.

[vipul_singh]

The value of GTO's calculation is not (as far as I can tell) to discourage people from upgrading. The point is that people do not realize that what they are paying for a new car is not [Rs. 12.5 lakh - Rs. 4.5 lakh] = Rs. 8 lakh, but much more.

All the benefits from the new car need to be weighed against Rs. 22 lakh (as per his calcualtions) and not Rs. 8 lakh

[Steeroid]

Makes sense to hold on to your car unless you have a NEED to upgrade. I've decided am sticking on to my truck for some more time for now.

However you also have the reverse scenario - lets say you have a 50-year old car, and then your garage plonks a 4.5 lakh bill on it, with more work left to be done! But that sort of situation will only happen to morons like me.

[filcord]

Am facing a similar dilemma, but with a twist.
accountant says to get a new car for the depreciation. I am reluctant to sell the Baleno, it gives me so much pleasure, the Getz could go, but it still has many miles in it. The twist is this - wife says to keep both, the Getz can be used by the kids in two years when they attain 18, and get a third small car, maybe the i10, for the depreciation.
I can't get the hang of this depreciation thing!

[GTO]

Originally Posted by DKG

Well GTO here's some more to add to your logic. Two of my cars are 69 and 71 years old and guess what - they are appreciating in value big time !!

DKG. Good one.

Of some of my previous cars : Esteem used for close to 2 lakh kms / 10 years. Zen, in the whereabouts. 118NE & Premier Padmini Diesel for about 1.3 - 1.5 lakh kms. Jeep : 1.42 lakhs and 10 years....new engine and here to stay. My '03 OHC Vtec = The way I see it, still a virgin @ 60,000 kms.

Originally Posted by vipul_singh

The value of GTO's calculation is not (as far as I can tell) to discourage people from upgrading. The point is that people do not realize that what they are paying for a new car is not [Rs. 12.5 lakh - Rs. 4.5 lakh] = Rs. 8 lakh, but much more.

Spot on! That's what I am getting at. I know far too many people who think that the cost of a new car is only the monthly EMI.

Originally Posted by Steeroid

Makes sense to hold on to your car unless you have a NEED to upgrade. I've decided am sticking on to my truck for some more time for now.

Remember, that engine should be good for over 2.0 lakh kms.

Originally Posted by filcord

Am facing a similar dilemma, but with a twist.
accountant says to get a new car for the depreciation.
I can't get the hang of this depreciation thing!

Remember, that the actual benefit of depreciation is NOT the entire amount claimed. For instance, you would claim 20% depreciation in the first year of owning a 7 lakh sedan. Thats about 1.4 lakh rupees. However, the depreciation is written down as a cost. Hence, the actual benefit is 30% (your income tax slab) or 1,40,000 = Rs. 42,000. Depreciation rocks, but I don't see how it can become the sole motivator of purchase.