[V.Narayan]

Originally Posted by locusjag

Hip hop star and Mogul Jay Z is quoted to have said something to this effect - "you can only truly afford something if you can pay for it in cash twice over and still be comfortable with it".

How's that for a financial thumb rule? This one comes with a Brooklyn accent, swagger and the fattest beats - courtesy, Jay Z.

Well said, locusjag. The entire question of affordability while buying a car arises because we are assuming here that a loan will be taken and EMIs paid over the course of a few years i.e. we mortgage our future assumed earnings to pay for a luxury non-asset that is more expensive than what our current savings and safety buffers permit. A salary man assumes steadiness of income with some reasonable truth to it. But with India's economy slipping seriously and dark clouds of trade wars with USA on the horizon if I were in IT as a salaried man I wouldn't stretch my budget and EMI too far. Better to buy what you can with the liquidity you have today than assume a steady or growing income 5-years into the future. In my time I've bought over a dozen cars all cash down with what could be afforded at that time's income and savings. EMIs were reserved only for real estate which all said and one has a tendency to appreciate.

[sridhu]

Originally Posted by motorworks

...For Salaried folks like me, that would not be even remotely possible for big ticket buys like Cars and Houses. Imagine shelling out 60-70L in cash and being comfortable with it! Or even a cool 10 lakhs for a Car for that matter!

Whether we agree or not, the only way most of us can afford to own good cars and houses is thru loans....

Actually the point is, whether you buy it on loan or on cash, what you can afford is the same. By taking a loan, and paying an EMI for it, you are essentially able to enjoy the goods while saving up for it. You pay an interest for that privilege. If you cannot afford 10L today, then you cannot afford 10 L as loan either. That is what the OP is trying to give you a framework for.

By buying a bit more than what you can afford, you are making an assumption that your salary & hence your affordability will be higher in 3-5 years and you are buying based on that assumption. Unfortunately, if that assumption fails, you are over leveraged. Even if it does not fail, typically people sell off the paid-for car and get into another loan with the same logic. And hence never get off (actually, it is never able to get off) the treadmill.

Ideally, you pay off a car loan in 3 years & continue the 'EMI' for another 3 years in the bank while you use the car. Then you have a decent corpus for the next car. But almost nobody, least of all me, does that.

[sansvk]

I have made some financial mistakes while buying cars.
1. Bought a Petrol Figo in Apr 2010 by paying cash. Yes, ~5L in cash, should have ideally taken a loan and invested the rest.
2. In 2013 got bitten by a bug to upgrade not because of the km running or any issues, instead the Ecosport was a more aspirational car to be in. Along with that I had just shifted job's, hence it was more of a lifestyle upgrade.
During the last 5+ years I have realised cars are cars and are meant for transportation and does not define anything else. My ex-boss, a multi crorepati used to drive around in his humble Red M800. New cars launches just don't excite me (leaving aside Kia Seltos!).
My resolution is that my next car would be bought only once I have a liquid networth greater than 1Cr and the OTR value of the car would be less 10% of my liquid networth.

[giri1.8]

Only way I calculate is, if I could afford to lose it and still buy it again comfortably without any big sacrifice. Cars/bikes are my biggest passion, but that doesn't mean other expenses need to take a backseat for EMI payments At the end of the day, there will always be a better car to upgrade to, that is how the market rolls!

This rule doesn't apply when its for someone else in the family, as it is just a one time expense! only the best would do.

[Tapish]

Great thread, I'll add a recent example to show why this is important.

I drive a 4-year-old i20 elite, that was passed on to me by my brother after three years of use. Impeccably maintained (barring a few dents) and always serviced at Hyundai. The car has seen pretty much everything between Leh & Ahmedabad and I plan to keep it at least for another two years. The loan on the car was paid off by my brother within two years, so I got it for free. When I got this car, I actually had enough cash to buy a SCross that i had been saving for a while for.

Another person I know just started his job. Total in hand salary of less than INR 40k per month and wanted my advice on a car. I suggested a used Swift/i20 but the person was adamant on a new Honda City that cost upwards of INR 10 lakh. Long story short, he borrowed 5 lakh from the family and took a 6 lakh loan and bought his dream car. One year down the line, the insurance was up for renewal. The person did what he thought was best - reduced IDV to 5 lakh to pay a lesser premium since his salary did not allow him to stretch enough. 4 months after this, the car was totalled in an accident. The insurance company covered only the outstanding portion of the loan (around 4.50). So my friend is now without a car, with a net 5-6 lakh loss and without enough corpus to pay the down payment on the next one. To further compound his woes, the accident left him with enough injuries to require a two-month bed rest so he lost his job as well.

IF he had been prudent about what he can afford and got a used i20/ new Swift, he would be loan free, he would have been able to pay the insurance premium and today would be in a much better situation.

A dark story but an important reminder that when calamity strikes, nothing better than cash in the bank.

[locusjag]

Originally Posted by motorworks

Imagine shelling out 60-70L in cash and being comfortable with it! Or even a cool 10 lakhs for a Car for that matter!

Whether we agree or not, the only way most of us can afford to own good cars and houses is thru loans.

Actually, there was a time 15 years ago when people used to save money to buy a home. My dad did just that at the age of 49 in 1999, with the aid of EMIs.

Along came Mr.Yashwant Sinha (Finance Minister in 2003)...he presented a monumental budget with these words - "...the Income Tax Act is now amended so that people can buy houses to save money..". Everything changed from then on. EMIs became a thing to buy one's dream home which would appreciate in value and also save tax for oneself.

In this dual world of home EMIs and car EMIs, one must not conflate the two. With a car EMI, we pay interest on the principal and also see the car depreciate, consume fuel, maintenance costs etc.

Originally Posted by V.Narayan

In my time I've bought over a dozen cars all cash down with what could be afforded at that time's income and savings. EMIs were reserved only for real estate which all said and one has a tendency to appreciate.

You've got it all sorted out sir! I've planned to come around to living such a life once I'm done with my TUV 300's loan.

And in a perverse way, we need people who keep churning newer cars onto the used market once their EMIs are done. That keeps used car prices down for us enthusiasts to bag them with cash.

[Hayek]

I think we have had a few threads on similar lines. The way I see it, your willingness to borrow to buy a car depends on your stage of life - and overall family situation. At 25, I bought a second hand Zen, spending almost 6 months salary. But I got a low cost loan from my employer, and was reasonably sure of seeing a significant increase in income over time. All my subsequent cars have been highly affordable - in some cases, they were purchased on company lease schemes but I could have bought them cash down if I wanted.

More generically, young DINK families can borrow to buy a nice car. But once you have kids, you need to make a realistic assessment of your income trajectory. And recognise that in a slowing world economy and with increasing trade barriers, the income trajectory of people in their twenties could be much more like of those who started their careers in the 1970s than those who started their careers in the late 1990s or early 2000s

[kspv]

Very interesting thread!

My first buy as a car in the initial years of my employment was a second-hand pre-1997 Maruti 800. I took Rs.1.5 lakhs loan for it from Apnacar at a quarterly compoundable interest rate that was nearly equal to 30% simple interest rate per annum. That gave me enough worries at that point of time (circa 2000 A.D.), and I somehow managed to pre-pay the loan back after one year. I eventually met with an accident in this vehicle at HSR Layout, Bangalore. I later sold the car for Rs.60,000/- after four years.

My next acquisition was a Hyundai Getz GLS 1.3 Petrol in March, 2005. One of my first threads on Team-BHP was about ICE install in this car at Auto Planet, Bangalore. Later, I happened to relocate to Hyderabad. But I have kept the car till date, and it still gets compliments for the way it has been maintained. Sure, I had scratches on the bumpers, and dings and dents on the rear & the doors due to careless two-wheeler drivers colliding. But everytime, they have been mended carefully. Whenever I get the itch to buy a new car, my way of holding back (and save myself from the inferiority complex) is to upgrade something in the existing car, which works out to be a much cheaper and satisfying option.

For example, I changed the wheels to alloys & tubeless tyres. Later, I changed all but the turning-indicators to LED (headlights / parking lights / fog-lamps / brake-lights / back-up lights / festoon-lamp / dash-board lights), which was a project in itself (I have a post about this on this forum). Recently, I got a Sony XAV-AX5000 Android Auto / Apple Car Play head-unit installed in this car by the famous Shakir of Khairatabad, along with a dynamic trajectory reverse camera. I also get the car regularly serviced at a very reliable third-party service centre at Sainikpuri in Hyderabad. Thanks to online sellers of spare-parts like Autocartz, Boodmo etc., (and of course, the Hyundai Authorized Service Centres), I have not so far had spare-part issues. The upgrades have kept the car very involving to drive. The car continues to be reliable, and does home-to-airport duty through the Nehru Outer Ring Road (72 kilometers one way) at 100 KMPH without breaking a sweat.

Many friends tell me that I have to change cars every five years. I differ with this, and tend to agree with the 10 year rule more. It is a financially and environmentally prudent practice to buy a car that is made to last long, maintain it well, and keep it unless the cost of maintaining the car becomes more than the cost of the EMIs for a new car.

[FrodoOfTheShire]

I have always been against loans/credit and haven't taken a single loan in my 32 years. I was fortunate enough that my parents were able to afford my higher education without any study loan. When I started working 10 years back, I bought a bicycle for my daily office commute rather than buying a bike on loan as my friends were doing. I was able to save enough during the first year at job to buy a new bike the next year paying full cash. 8 years later, last year, my wife and I bought our first car (my dream car, Ford EcoSport) after saving/investing specifically for a car fund over 5 years.

My loan/credit savvy friends were horrified to hear about my car purchase, but I am very proud that the car belongs to me from day 1 and not to any bank. Car is a depreciating item and it doesn't make sense to me to pay more money via interest while losing value through depreciation. Also car or any vehicle is a luxury, I would rather buy a smaller or cheaper car with the money I have than buy a more expensive car using borrowed money. The chest thumping feeling of having bought the car with my own money and walking debt free with head held high means a lot to me.

PS: Doesn't mean that I am against loan/credit. I am open to study loan and housing loan albeit in a planned manner, since one can't postpone studying and buying a house is a really expensive affair.

[jezza]

While I get that the general opinion is to avoid loans and EMIs, if the money one saves by not paying cash down can be better invested with a higher return compared to the interest rate of the loan, it may be wise to go for the loan instead.

[vagabond128]

Originally Posted by jezza

While I get that the general opinion is to avoid loans and EMIs, if the money one saves by not paying cash down can be better invested with a higher return compared to the interest rate of the loan, it may be wise to go for the loan instead.

Do remember, returns are uncertain but interest is certain.

[Hells Bells]

I don't get the logic of buying anything in cash unless my cost of opportunity is lower than the interest rate of the loan. Plain financial planning tells you to park your cash where it gets the highest leverage. So unless the investment market is totally tanked for the next 2-3 years, I am sure minimum cost of opportunity will be 8-9% (with a sound mix of debt and equity instruments). No way will I park a large amount for a car when I can choose to take a loan at 7-8% and invest for the delta of 1-2%. Plus, if you are wise enough, you will make more than 8-9%.

I also find it amusing that people justify a housing loan with the aspect of "It will appreciate". Against an interest rate 8-9% than a housing loan incurs, I doubt if the appreciation as a long term average is that high in real estate. Even after accounting for the tax exemption, the fact that it is such an illiquid asset makes me so wary of the asset class as an investment.

However, I started going OT. For me, the only measure I look at is my overall outflow in EMIs should not exceed 25-30% of my take home. I then manage my overall materialistic aspirations within that range. The EMIs includes housing loan too.

[lazy]

Interesting discussion.
And there is indeed no one rule that fits all, since everyone has a different viewpoint towards life and different priorities.

The 2 rules that I have tried to implement over my car buying experience (4 in total) so far:
1. Buy the car without loan,
2. Its costs of upkeep/running/maintenance should cause zero bother.

cheers
lazy

[Kosfactor]

Again, please my friends do not lose objectivity while making a purchase (if you finally do) , A car is better than no car and for that matter getting the one that suits your requirements is super important. And in some cases think a little ahead into future, like a marriage and kids etc.

Let's think about utility (most cars are useable) , assuming affordability through cash/loan here for the remainder of this post.

If you are a loner/single, buying the cheapest hatch Alto with cash in hand makes sense, if you have a family of your own then you are taking them on a torture trip(when you could have stretched a bit) - you know why dzire sells in high numbers now and sometimes overtakes Alto sales.

So what if you discover the traveller in you ? Will you hold onto it for the next 5 years or buy something on loan that takes you places? Say a large hatch like Baleno or i20.

What if you live in a joint family? Would you buy a Celerio with your saved up money or an Ertiga on loan?

It is very important not to lose sight of our objective with a car purchase.

[am1m]

Originally Posted by V.Narayan

In my time I've bought over a dozen cars all cash down with what could be afforded at that time's income and savings. EMIs were reserved only for real estate which all said and one has a tendency to appreciate.

Thanks for posting, rare to hear something like this. I always wonder if I'm being stingy by not splurging and taking a loan to buy a bigger car, but the math doesn't make sense to me and I stick to vehicles that I can afford all-cash. (Not to mention the horrible traffic conditions that I'll be using that vehicle in 95% of the time. )

Originally Posted by vagabond128

Do remember, returns are uncertain but interest is certain.

Most of us forget this! All of us assume that we're super-smart investors who will 'beat the base rate of return' always. Doesn't happen in most cases. I'm at a loss whenever I hear the take a 'loan for the car/superbike machaa and invest the cash you have in hand in xyz fund, xyz scheme'. I always wonder what about the interest over a long term like 5 years.

Originally Posted by FrodoOfTheShire

I am open to study loan and housing loan albeit in a planned manner, since one can't postpone studying and buying a house is a really expensive affair.

Yes, because both, education and real estate are appreciating assets, they will both generate additional income for you and pay for themselves many times over if you choose the right option and use them wisely. Unlike a vehicle which is almost always a depreciating asset (unless it's a rare vintage piece that appreciates over time, few and far between).

All in all, great to hear things like this in these YOLO (you only live once so splurge on credit) times!