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!).
Next Page >
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.
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.
