[FrodoOfTheShire]

Originally Posted by tarik.arora

Reading all comments on this thread makes me believe that car loan penetration would be pretty low. May be just 15-20%, but, is that true? I don't think so. May be people on this forum are more privileged than an average Joe (big assumption) and thus can afford to buy a x-lac rupee car which equals just 0.1-0.5x of their annual income.

Certainly not more privileged, but definitely better informed and as a result better planned than the average Joe on matters of car purchase.

We BHPians and those following this forum are definitely better informed like when to buy used car vs new car, buying insurance from dealer vs outside, latest prices/discounts, avoiding handling charges, avoiding unnecessary dealer accessories etc etc. These can directly affect the money spent on the overall buying process and can substantially reduce the cost if one is well informed.

[tarik.arora]

Originally Posted by FrodoOfTheShire

Certainly not more privileged, but definitely better informed and as a result better planned than the average Joe on matters of car purchase.

We BHPians and those following this forum are definitely better informed like when to buy used car vs new car, buying insurance from dealer vs outside, latest prices/discounts, avoiding handling charges, avoiding unnecessary dealer accessories etc etc. These can directly affect the money spent on the overall buying process and can substantially reduce the cost if one is well informed.

While i agree with you point on us BHPians being more informed and thus can crack a better deal. However, the topic is a bit different here as even an informed person can save 30-40k on a 10-lac rupee car (just an example) purchase. The discussion still holds true for remaining 9.6-9.7 lacs in my example.

Also, i just realised that the use of word 'privileged' can be taken in a wrong context. It does not mean inherited in any manner. A person can stand on his own feet and afford a car that is valued at a very small percentage of his annual income. I will still call him privileged in some form, loosely may be. I am not sure if i am able to explain what i mean but i am sure everyone will get the drift.

[rapid_fire]

These guide lines are good to get at an over all idea about how much we can spent on a car. But there are a lot of variables in it. The gross annual income is a big factor. To get a C segment sedan, now a days we have to spend 10- 15 lacks. That will be the 50- 100 % of the anual income for most of us. If we are buying a car for 10 years, i dont find it to be a big financial burden. But of course it depends on our other recurring expenses such as home loans, education loans etc. I feel like compromising on saftey and comfort is big mistake, especially if you are spending a significant time in commuting.

Originally Posted by Tapish

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.

In this example, if he would have gone by the rules, he should have get car for 2.4 lacks (50% of the anual income) , assuming he was not interested to take pre owned route, he could have get a Nano or an Alto, and suppose he met with similar accident which resulted in a total loss of honda city, his finances would have been intact, but the injuries would have be much more severe or even fatal. The hospital bills nowadays could cost be as much as that of a new car. The mistake he did was that he reduced the IDV of vehicle to save small amount in the insurance premium.

Originally Posted by GTO

I'd personally never be comfortable spending 50% of my gross on a car. My current comfort level is 10% or less. However, back in the early days of my career, I might have gone to 25%. But never, ever half my gross.

Just to clarify = what I mean is to not spend more than 10% of your income on a car (including EMIs, insurance etc).

The 50% criteria is for the car affordability (on road price) i think. The EMI and insurance etc are the anual expense which according to the rules in the OP should be 10%.

[arit.mondal]

Originally Posted by libranof1987

We have people earning well over 50 lakhs sticking to a sub-15 lakhs Maruti while those earning 10 lakhs buying a 25 lakh Innova.

I have seen several folks earling 10lac or lesser buy 20l+ car like Innova, but in almost every case they had someone from family (parents or partner) to fallback on for other expenses such as saving up for that house, etc. Maybe the guidelines are meant for single earning salaried guys without having family cushion to fall back on?

[civic-sense]

Originally Posted by GTO

I'd personally never be comfortable spending 50% of my gross on a car. My current comfort level is 10% or less. However, back in the early days of my career, I might have gone to 25%. But never, ever half my gross.

10% is way too conservative even for the regular buyer. With that rule, I'd need to be earning more than a crore to buy a top end Swift. How many of us draw that kind of salary?

PS: Or did I get the math wrong?

[sridhu]

Originally Posted by rapid_fire

These guide lines are good to get at an over all idea about how much we can spent on a car. But there are a lot of variables in it. The gross annual income is a big factor. To get a C segment sedan, now a days we have to spend 10- 15 lacks. That will be the 50- 100 % of the anual income for most of us. If we are buying a car for 10 years, i dont find it to be a big financial burden. ...

The point is what you can conservatively afford is what the OP said. You are making a lot of assumptions in your post above. By using the OP framework, you can ensure that you surface the assumption, consider it & then accept or mitigate it. Else people could get into an unafforable car unknowingly.

For eg, getting a 10-year old Merc C class for <10 lacs (for example) looks like a good deal until you realize that one tail light costs about 85k.

So, even with 'afforable' new cars, you need to consider other costs spares, insurnce, maintenance etc, not just EMIs

[ani_meher]

Great discussion. Car ownership as a proportion of annual income should always be considered, especially by those who think in terms of EMIs.

Additionally, one must consider the recurring costs such as insurance and servicing as well. I was shocked to see insurance of Creta automatic at more than 90k, it is more than the medical + life insurance premiums of a family!

[jetsetgo08]

Originally Posted by civic-sense

PS: Or did I get the math wrong?

If I am not wrong, what he meant was 10% of the gross annual income on the yearly expenses of the car(EMI's,insurance,fuel,maintenance & other miscellaneous expenses), and not the total value of the car itself.

[rapid_fire]

Originally Posted by sridhu

The point is what you can conservatively afford is what the OP said. You are making a lot of assumptions in your post above. By using the OP framework, you can ensure that you surface the assumption, consider it & then accept or mitigate it. Else people could get into an unafforable car unknowingly.

Exactly my point. Give a rough idea about how much you can afford.

I didn’t say anything about buying a pre owned luxury car. Just meant that the safety should not be compromised when going strictly according to these rules.

[AirbusCapt]

Keep life simple. Follow the 1/3 rule always, no matter what your take home. Divide your take home into 3 parts. One part you invest. Second part you pay your emi, third part you spend on living expenses and on fun.
Let's take for example a take-home salary of Rs 300,000 per month. You invest Rs 1 lac, your emi (house/rent/car,/bike) should be one lac and your kharcha should be one lakhs.

Trouble starts when you overspend on one basket, say emi slips to 1.5 lakh, then you either reduce monthly spending to 50k or invest only 50k, in either case not a happy picture

[SoumenD]

This 10% rule isn't really clear to me. Does it mean if you, for example earn 30L/year, you should go for a car worth 3L at max i.e. maybe an Alto/Go+?

Or does it mean your expense for the car (EMI+Fuel+insurance+maintenance) should be max 3L per annum? That would give one a window of any car till ~8-10L OTR.

I believe this % will vary as your age & salary goes up & responsibilities increase. A young bachelor in mid 20s with lesser responsibilities can spend upwards of 25-40% on car easily, however a 30something married person with a family to take care probably can spend max 10% on a car as he has to take care of child's education(a huge expense these days), home loan EMIs/rent(incase he stays away from home-town), retirement corpus etc.

Personally I try to stick to 25-30% of take-home in total for EMIs(HomeLoan+CarLoan) and its been OK-ish till now with that.

[aniyo]

Originally Posted by SoumenD

This 10% rule isn't really clear to me.

The 10% or 20% rule is the total expense on the car for the whole year including depreciation.

Say for example your salary is 30L gross so the total outflow is 3L recommended and 6L max. Calculation as below

Car price: 15L
Downpayment: 5L
Loan: 10L
EMI: approx. 21K
Yearly EMI outflow: 2,52,000
Fuel: Diesel
Cost of Fuel: Rs.4.8/km
average monthly running: 1200
Total cost on fuel yearly: 69,120
Depreciation: 15%
Cost of Dep: 2,25,000
Insurance: approx. 45,000
Total outflow: 3,66,120
This is about 12% of your gross. Depending on other commitments one can decide from 10-20%
Note: Depreciation and insurance cost will reduce over the years and the maintenance cost will increase> i assume they will cancel out each other. So the calculation will hold good for 5 year period

From pure finance perspective we must include opportunity cost of the 5L as well. Say 10% return will yield 50K/year so the total outflow now will be
INR 4,16,120. This is now 13.8% of Gross salary.

[Latheesh]

When I bought my tiny Chevrolet Spark it was around 70% of my gross annual income then. These calculations are scary :-)

If you have a net worth of 1 Crore, go buy that 10-12L Rupee car by paying in full unless you have major tax savings through company purchase or car lease scheme.

Otherwise your monthly car expenditure towards car including EMI should not cross 10% of your take home salary and loan period should be equal or less than 4 years. If you think you cannot get the car you want within this calculated budget, better delay the purchase and save to make more down payment.

You can take bit more risk if you do not have any other EMI payments.

[spr1ngleo]

Originally Posted by rapid_fire

The mistake he did was that he reduced the IDV of vehicle to save small amount in the insurance premium.

dumb question: can you reduce the IDV on your own, to save on insurance cost () ? so far whenever i bought the comprehensive insurance on policybazar, IDV was auto-calculated. pls advise.

[MukundanMK]

Originally Posted by spr1ngleo

dumb question: can you reduce the IDV on your own, to save on insurance cost () ? so far whenever i bought the comprehensive insurance on policybazar, IDV was auto-calculated. pls advise.

The answer is, to a certain extent yes. You can read the below article for reference.

Link