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Hi all,

For those who missed reading an article from Economic Times,Investor Guide suppliment published on Monday....it gives indepth study of financial calculation needed to own & run new cars.....its very interesting.....

Racing ahead? Just brake and think
MUTHUKUMAR K

TIMES NEWS NETWORK[ MONDAY, SEPTEMBER 11, 2006 02:35:01 AM]

Owning cars is about sheer passion and adrenaline rush for some. But then what’s the ‘price to passion’ ratio? If the latter denotes the joy of ownership, and the former the price you actually pay in real terms to own a car, then as a car buyer, you need to ask the above question and also answer it with a lot of conviction.

Contrary to popular belief, owning a car is not just about making that one-time payment or paying those EMIs. The running cost in terms of fuel costs, maintenance, insurance, depreciation, interest payments is often significant.

Big Bucks’ calculations reveal that the average cost of running a car is anything between 50% and 80% of the total EMI outgo on a car. This is substantial. Therefore, take a holistic view while buying a new car.

The price of popular cars today ranges from Rs 2 lakh to Rs 12 lakh. Let’s assume you were to buy a new car costing Rs 5 lakh and use it for five years. The usual way to analyse affordability is to look at its EMIs and see if they fit the bill (i.e. your monthly income levels).

For a Rs 5-lakh car, EMI payments roughly come to Rs 8,600 on a five-year loan with 80% financing. But then, there is much more that you pay besides the EMI. Our calculations show that additional recurring costs could be as large as Rs 5,850 per month over a five-year period.

Fuel is the single largest expense in running a car. It is roughly 50-60% of overall running costs for a car owner and it’s only rising. Take the case of retail petrol prices in India, which have gone up by 55-60% in the past three years.

Higher petrol prices are hitting the car owner much more than before. Here’s how. Assume you run 15,000-22,000 km a year. Depending on the car, you get 10-15 km per litre. This means you spend in the range of Rs 2.5 lakh to Rs 5.5 lakh over five years.

This figure again assumes you’re a model driver, and juice the car for what its worth. If you are going for a diesel version, you save some bucks, depending on whether the diesel version exists for the particular version you want to buy.

Then, there are maintenance and servicing costs. If all goes well, you may get away with the usual servicing costs, which could be anywhere from Rs 2,500-5000 a year.

But things are seldom as easy. Changing of tyres, shock absorbers, air filters, clutch plates, break pads, batteries are usual in the span of first five years. Throw in floods and potholes for good measure and you need more servicing.

We estimate a typical car owner will spend up to Rs 32,500 over five years on this. Car owners usually have to replace a whole set of tyres once every three to four years. A whole set of five tyres will cost Rs 10,000-22,000 depending on the car. Then factor in the compulsory car insurance.

The insurance premium you pay for a comprehensive policy is directly proportional to the value of the car. Car insurance is today fixed on the insured’s declared value (IDV), which is roughly its market value.

Rough calculations show that for a Rs 5-lakh car, one could be paying around Rs 60,000 as insurance premium over a five-year period. With the de-tariffing of car insurance coming into effect from next year, premiums could get even higher if you are on high accident zone, wear spectacles, ride a red car among others.

Then, car buyers often ignore depreciation or the losing market value of the car on usage. Buy a car, use it for a week and try and sell it and you know what is being talked about. Over a five-year period, the average depreciation has been around 50%.

A lot depends on the second-hand market of the model under consideration and customer preference for such models going forward. In the worst case, you may get only 25% of the original cost.

Lastly, there are those interest payments if you are taking a loan. On 80% financing, you could paying an interest of Rs 1.2 lakh over a five-year period. In total, you will be shelling Rs 4.6 lakh over a five-year period almost equivalent to the cost of the car, or 20% every year as running costs.

The actual costs could be very different based on the value of car and, as a thumb rule, will be more for small cars since fuel costs constitute the significant part of overall running costs. So do your due diligence

In the end, know that owning a car is not just about making those one-time payments. There is much more to it. The rising fuel prices and the overall running costs may actually make you rethink your decision. Do your due diligence. After all, it is the second most important asset you will probably own in terms of value.

The facts depicted in this article is cent-percent true.

Most people blindly buy cars simply because the next-door-neighbour is having one and squall lately !!! After all, after having spend lakhs mostly for snob value alone we should never regret later.

I've seen people selling off their sparingly-used brand new cars because of debts arising out of their own pudden-head decisions...

great article. i agree with mithun that cars are very often bought for snob value. the car you own is very often associated with your social status.

Its a very good article. I too agree with all the points over here. But how many of us will stop buying that inspite of knowing the truth???? ;)

Over the last hundred years, cars have come to stand for freedom and dreams. Till the time the bus or the bicycle replaces this in popular perception, cars will continue to haunt every Joe-and-his-neighbour's imagination, fuel costs notwithstanding.

Thanks for it sharing it @finetuning. This shows why people have started preferring Diesels over Petrol. Fuel Expense and Interest Rates are the real killers adding significantly to the running cost of the vehcile. As its been repeated by many in this forum, Fuel Effeciency is the single most important factor for Indian Car Buyers. This is the reason why cars like Ford Ikon TDci though design is dated still makes sense to lot of buyers. I also wish I could buy Cars outright no hassles with these Interest rates and EMIs.

The last line in the article says its the 2nd most important Asset. It probably is the 2nd highest expense for most people and its hugely depreciating one.

Very true most of the Joe's buy cars to satisfy there own ego, social status or they have a demanding Girlfriend/spouse. I am always of the opinion that unless you have a really compelling reason you should not buy a car on EMI. I don’t understand that what is the fun of giving your hard earned money to banks in the form of interest and complex processing fees.

Nowadays people doing just 20-30 km/day are opting for diesel engine when asked they say that it is cost effective and every one is going for it so do I. I feel like laughing at there ignorance ,running is so less and they might not recover there high initial investment on diesel engine. That known as heard mentality.

In short one must remember that investment on a car always deprecates and if you choose a non popular model then forget about any resale value.

Add Skoda maintenance or a Safari depreication, an Accident or Two, a V6 Accord or 2.4 CRV thirst, a flat BMW run flat or a merc authorized service, and the ration could get even more skewed.

It the end it is all about what one wants out of a car, and what maintenance one can afford in a heart over head decision.

One lives ones life only once and some decision of heart should not be regretted, one cannot get back two things in life, age and health, money can be earned later and even done without, but if one misses out on the pleasures of life simply due to the head ruling over all decision, then in the final analysis one just may regret the decision one took earlier in life.

Yep, practicality is a virtue but not at the cost of the joys of life. If one is simply going to consider the cost of a car, the fuel, maintenance and resale value, it might actually be cheaper to travel by bus / rick / bike than to go in for a car and will have a lot more in the bank as a result. The choise of how one lives ones life today depends on the person money may be in short supply in future, but age simply wont come back for sure.

All this is true And the article has taken only 5 years as the lifetime of the car. Increase that to 15 years the cost of owning a car will be roughly 3-4 times the value under normal usage conditions.

@tj123
You answered your question yourself. Ego , social status, etc is what drives prople to spend there hard earned money on not just cars even other things like food, homes etc. Why spend Rs.5000 for dinner at Maurya Shearton when you can get the same for Rs.100 at a normal restaurant? There are things that you do to staisfy yourself.

Not many people are as knowledgeable about cars as say people in this forum. so people make choices from the limited knowledge they have. And the market perception is

"diesel cars are cheaper to own"

True the value of a diesel car is higher. And so is the resale value. In quite a few cases like for example, it is very easy to sell an Innova diesel when compared to the petrol one. Apart from that recent diesel's are easy to drive around.

great sharing.
as many have commented before, here in India it is about new found freedom, the rise in corporate salaries, new industries having created new jobs and a certain financial independence.
it is most definitely about status - which man earning say Rs 10 lacs a year would want to drive anything less than a Rs 5 lacs Swift type car? typical aspiration levels lead to this.
indeed, with availability of loans and credit, the vehicles people drive are often no real indicator of their economic status at all - for example in the big cities quite often one can see people driving far more aspiration driven cars than their actual status in terms of earnings may permit.
look at that Indigo CS ad - first jobber trying to play the game of one-upmanship with his boss by buying a car with a boot. The car with a boot syndrome is quite peculiar to our scenario - for some reason it appears to signify that one has "arrived" in life.
And the other point- the frequency with which people upgrade their cars these days - once every three, four years! amazing considering this is such an expensive asset.
each time one jumps up the corporate ladder, the most visible trapping of success that simply MUST be changed appears to be one's car! it is fantastic, the change that appears to have happened right before our very eyes over the last 7 years!

but the overall devils of EMI plus maintenance and running costs will never really go away - most consumers will simply sweep them under the carpet because they are "inconvenient truths".

I suppose we will live and learn!

A very nice thread, thanks for sharing Finetuning.

Yes, owning a car involves a lot of expensis apart from the down payment and EMI's.
Expensis like Mainatanence, Fuel, Parking, Insurance, Road Tax etc.

But there is a golden rule as well, the more you drive the more your cost comes down, so for someone doing 700 kms a month (like me) and for someone doing 2000 kms a month the maths would be totally different. For people who clock high miles, a car tends to be cheaper in the long run compared to Taxi's.

That is why you should try and keep EMI within 10% of your monthly income, and never cross 15%.
Thus, if you earn 50,000 a month, your loan (5 year term) shouldn't exceed 3 lakhs. That would mean that you shouldn't buy a car that costs more than 3.75-4 lakhs. Now how many guys do you know who earn 50k a month and drive a City/Verna/Fiesta segment car? Quite a few, I would say.

This is actually a very interesting article. To be honest, I never thought much about these points when I bought my car in the States, and now, I am paying for it and actually wondering whether a taxi would be cheaper.
However, the freedom and practicality it has given me cannot be matched by a taxi. However, I have learnt from my experience, and those of my family too.
My family bought an E270 CDI thinking of keeping it for 7 years, and right now, replacing it for another, more reliable car is not an option. However, fortunately, our family can afford the maintainance without much worry, but I as person have learned the following:
- When buying a car on an EMI, make sure you can afford to pay the EMIs for a while, even when incomes reduces. Basically make sure you have money saved to account for a loss of income.
- If you can afford a Rs10L car (including the insurance and petrol and maintainance), spend maybe 75% of that, and keep the rest towards any unforseen incident that might occur. What if the car gives problems and needs to be replaced/repaired?
- If you have a budget of Rs10L total to spend on the car, including insurance and maintainance etc, spend only half that amount, and keep the rest aside for fuel, maintainance, insurance, etc.
- Keep the car going for as long as possible, but once the repairs start coming up, and the car visits the service center once every 1-2 months, it is time to change. The car is nearing the end of its life cycle and IMO, it isn't worth the hassle and the second thoughts one might have before going on a long drive - This is of course assuming there is no sentimental value attached to the car, and that one can afford the new one.

P.S.: The last point is one I don't agree with too much being a car enthusiast. With so many new cars coming into the scene, and with limited parking space, and the desire to buy many of those newer models, I can see myself changing a car before it reaches the end of its life cycle. Of course, assuming the car has no sentimental value, or hasn't pulled at your heart too much.

Hope I am making sense.

Very good article. Financial calculation wise it makes more sense to buy a 2 yr used car and sell it 3 yrs later. That way neither you bear the brunt of too much depreciation nor do you loose out of benefits like warranty and so on.

A bit OT: I remember having read a similar article in ET which actually calculated to show that in certain cases it might be cheaper to rent a house your whole life than buy a house.

Yep but there are other cases.

1) Tata Safari comes with a 4 year extended warranty. It depreciates to almost 50% of new price in 2 years. Yet the peace of mind that it comes with originally with a 4 year warranty is gone. (and it does requie the warranty).

2) Skoda's depreciate about 25-30% in 2 years but then are out of warranty and cost or repairs can be quite high.

3) Cars that are very reliable (like the accord 2.4) do not depreciate that much in the first 2 years and possibly make more sence buying even after 3-4 years with good deprecation and reliability.

4) Chevys come with 3 year warranty and cost zero to maintain in those years and after the 3 years are over things are very different.