Team-BHP - Financial thumb rules to follow when buying a car

Dear Moderators,
Not sure if this violates any forum rule or is under the correct thread. Advance apologies as this is my first post here.

Saw that turbo charged swanky automobile whizz past you. You see your best mates changing cars every three years. You absolutely love that fancy new car launched..These thoughts might have crossed some of us. As much as we buy our car from our heart, a head too has a role to play. I love cars with all my heart but my head thinks about money too.

Buying a car may be a dream for some , luxury for some or just a necessity for some. Whatever be the scenario, I have complied few financial thumb rules that may help you in making financially prudent automobile purchase decisions

Note: Thumb rules are not set in stone or scientifically proven but are prudent financial guidelines.

20/4/10 Vehicle rule
This rule talks about the prudent practices while purchasing a vehicle / car by way of a loan.

Rule
The rule states that you should make a down payment for the loan of at least 20% of the on road price; the tenure of the vehicle loan should not be more than 4 years; the total expenses towards the car ownership should be less than 10% of gross annual income (total expenses ideally should include vehicle loan EMI expenses + fuel expenses + insurance + any other vehicle expenses like parking rentals )

Example
Let us say your annual income is 20 lacs (20,00,000). This rule states that your yearly transportation costs (car loan EMI + annual fuel expenses + annual insurance) should be less than 2 lacs.

50% Car rule
This rule talks about the maximum price we can budget for purchase of a new car.

Rule
Car affordability = 50% of Gross annual income

Example
If you are making 20 lacs per year (gross) then you can plan for a car worth 10 lacs. In this case if you wish to go for a new Audi Q7 worth 70 lacs then clearly you are stretching beyond your affordable range.

10 year Car rule
This rule states that to be financially prudent one needs to use a new car for at least 10 years. Car is one thing which depreciates quickly. The value of a car falls minimum 15% the moment it hits the road and is out of the showroom.

10 years of vehicle ownership is considered ideal to get maximum value of your vehicle purchase taking into consideration the effects of depreciation as well as possible spiraling of maintenance expenses of older vehicles.

Generic -
36% Debt rule
Assuming you are a wonderful customer for your bank having availed housing loan, vehicle loan and personal loan then this rule states the maximum amount you can spend by way of loan / debt payments

Rule
Maximum Monthly debt (EMI) payments = 36% of Gross monthly income

Example
If you make 1 lac (1,00,000) a month then the total of all your monthly loan EMI’s should not exceed 36,000

Its better to be approximately right than precisely wrong. Use these thumb rules as a general yardstick than a precise measure.

Would love to know of anymore thumb rules while buying a car

Happy Motoring
Bluehead

While these thumb rules may look prudent on paper, there's no one-size-fits-all. Various people have various needs/constraints/obligations that can make the decision flow one way or the other. 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. Throw pre-owned cars in the mix and the whole equation changes.

Considering our growing economy and that vehicle penetration/ownership are still pretty low, a lot of car buying decisions may seem financially "imprudent". That said, there indeed has to be a healthy earnings:debt ratio.

Here's another thread on this:
https://www.team-bhp.com/forum/india...salary-23.html

Thanks Bluehead for sharing these rules. Everyone has some sort of a thumbrule in their heads that guide them with their purchase, it is nice to see them listed down and analysed (I'll leave this to SmartCat :))
One suggestion is to have an explanation/reasoning for these rules, since to a layman like me, it doesn't make sense why the 36% debt rule, why shouldn't it be 40 or 30 for that matter.

Quote:

Originally Posted by libranof1987 (Post 4608452)

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.
Considering our growing economy and that vehicle penetration/ownership are still pretty low, a lot of car buying decisions may seem financially "imprudent". That said, there indeed has to be a healthy earnings:debt ratio.

Are there cases where a person earning 10 lakhs buys a 25lakh Compass? In that case is there a justification of it being a financially sound decision? Not skeptical, but curious. Since buying a 25 lakh innova would still a better bet financially than buying a JC?

Thx for these but I dont know how much one can follow them. For example right now I am in the market for a new car to replace my old one but I dont want to downgrade "Mainly because of safety". The cheapest safe car I could find was the Nexon but it has space constrains after that is the Ecosport, XUV300 and Venue but no idea on how safe XUV300 and Venue are after all hyundai did alter the new i20 to save cash. Given the <4m requirment no idea how compromised both these products are.

That leave the more expensive options which have it all but are also more expensive. So I leave it at that buy a more expensive car but use it for a longer time 10-15years. Thats my logic for right now but I am open for a better solution always.

Quote:

Originally Posted by Brishti (Post 4608491)

For example right now I am in the market for a new car to replace my old one but I dont want to downgrade "Mainly because of safety". The chepest safe car I could find was the Nexon but it has space constrains after that is the Ecosport, XUV300 and Venue but no idea on how safe XUV300 and Venue are after all hyundai did alter the new i20 to save cash. Given the <4m requirment no idea how compromised both these products are.

We were in similar situation. Not sure about your needs or family size. In my case it’s me and wife and a child maybe by next year. We have a home loan and the emi for that is about 20% of our take home salary.

Initially I liked the Creta but both of us felt it way too overpriced. We checked everything under 20L and were quite interested in Hexa or Harrier. Hexa rejected as we did not need 7 seater car at least for 3-4 years and Harrier was good but bit too big for our liking.

Nexon ticked all the boxes. The boot can hold 2 large suitcases and one small and one airbag..we have stuffed so much and travelled. Tallest in our family is 5’10 so rear space was quite good. We felt this was the most rounded package at the price point.

We did not consider sedans, one I have started getting back pain as I drive a lot in city, am in sales. Second ground clearance in Bangalore. Just yesterday I was in hurry to get to a place and many time I could just take one side of car off the road and overtake cars or slow moving tractors with ease. Also I don’t need to come to a crawl over speed breakers.

Also Nexon we could buy it in cash after selling off our Brio. This was a big bonus for us. Hope this helps

I was at IIMB yesterday having an interaction with some current students and some recent alumni during a session termed "Protean Careers" ( had to look that one up!).

The people were all experienced folks in the 30-35 years age range.

There were a lot of questions on how you switch into an entrepreneurial venture & how you handle a toxic boss.

Among various answers/ advice that our panel gave, one stood out: "Get your financials in order before you start. "

It further brokedown into more specific advice like:

Decide how much you can burn before you start and ruthlessly get back to a job if you burn it without hitting your 'GO' condition until you can try again.
Plan for medical independence
Dont burn any bridges
Learn how to interact with people
And start financial planning early

Basically it was said, "You need to quickly build a I QUIT corpus. It is the amount of money you need in your bank that enables you to say "I QUIT!" To your boss before you hang up the phone."

Looking at some of the responses on this thread to the OP, I feel that the panel's message has to reiterated. However much you consider yourself a gear head (we all do!) a big ticket spend like a car is a 'head' decision. While I might not agree with some of the OP's specific numbers, I completely endorse his framework. Good show!

If you want to experience driving a high end car, rent it for a trip. (IMO most cars should be bought this way. Living with a car teaches you more about it than a mere test drive can).

If you want speed, buy a Duke 390 - beats most cars on 0-100 handsdown. (Take it to a track.)

But buy ( and replace ) a car based on need, safety and affordability. If you can afford it (as per the framework here) then by all means, go for it!

Not based on how awesome it is or how cool it will make you look.

Quote:

Originally Posted by locusjag (Post 4608816)

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.

Almost fell off my chair reading Jay Zs quote. Well he can afford to say that! 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. Sure, there needs to be a balance on monthly commitments and not go overboard. And I have always believed in the method of creating a corpus every year for paying off these loans well in advance. Have done that for all my earlier cars and one home loan now. And I do have one Car loan and Home loan currently on, which I intend to pay off well before the tenure.

Quote:

Originally Posted by Bluehead (Post 4608439)

20/4/10 Vehicle rule
This rule talks about the prudent practices while purchasing a vehicle / car by way of a loan.

Rule
The rule states that you should make a down payment for the loan of at least 20% of the on road price; the tenure of the vehicle loan should not be more than 4 years; the total expenses towards the car ownership should be less than 10% of gross annual income (total expenses ideally should include vehicle loan EMI expenses + fuel expenses + insurance + any other vehicle expenses like parking rentals )

Example
Let us say your annual income is 20 lacs (20,00,000). This rule states that your yearly transportation costs (car loan EMI + annual fuel expenses + annual insurance) should be less than 2 lacs.

50% Car rule
This rule talks about the maximum price we can budget for purchase of a new car.

Rule
Car affordability = 50% of Gross annual income

Example
If you are making 20 lacs per year (gross) then you can plan for a car worth 10 lacs. In this case if you wish to go for a new Audi Q7 worth 70 lacs then clearly you are stretching beyond your affordable range.

Hi Bluehead!!

Not sure if I understand this.

Considering these 2 rules, if I have annual gross income of INR 20L and I get a car worth INR 10L, with a 20% down payment, I should take a loan of INR 8L. If I take a 4 year loan on 8L, my yearly EMI would surpass the yearly 2L figure of expenses by a significant margin. The EMI will be around INR 20K per month.

Considering I spend INR 5000 on fuel per month which is around 700 KMs depending on the car, I will have INR 1.4L left. Out of which I will be paying maintainence cost of say INR 10K. So with INR 1.3L left for 12 months which will be approx INR 10800 to pay for EMI.

Help me out here.

Quote:

Originally Posted by Pancham (Post 4608843)

If i understood Bluehead correctly, your purchase should fit within the 3 rules stated. Though you might be able to afford a car worth 10l of your income is 20l, you should go for one that fits the other rules as well. So, you should probably buy something around 6l, 1.2 down payment and the rest on a 4 year loan. EMI should come around 12k totalling to 1.44l a year and 6k maintainence ,with the rest 50k for fuel, insurance and other expenses. Keep in mind that the income stated is gross and your debt is less than 36% of gross income (10% for a car and the remaining 26% for other expenses). Given your monthly running, I'd say a swift/ignis petrol or the likes fits your requirements.