We are living in a world where mobility is becoming a service. Gone are the days, when buying a car was the ISO accreditation equivalent of doing well in life. Today, if you are living in one of the top 50 cities in India, you are less than 15 minutes away from “ola” or “uber” your own cab. You can “Zoom” a car for that long drive that you wanted to take with your life companion. I am not even going to talk about the public infrastructure of bus and trains. So, with such diverse options I ask you again, do we really understand the economics of owning a car and more importantly do we really need it?
Of course, I can literally feel some wondering why shouldn’t we own a car. Let me take you through experiences of two of my friends. I took some pain to understand the economics of owning a car and it just doesn’t add up.
Impulsive buyer without full grip on economics of owning a car
I recently met my friend Babu last month! He is a very astute person who’s slaying it as a marketing upstart in a MNC placed out of Delhi. He shared me his experience of buying a car a year back. With numerous advertisements of zero percentage down payment, he walked into a Maruti showroom literally with empty pockets. He test-drove swift base variant. Falling in love with the car, he drove back to his home with his new car.
He was kind enough to share with me his economics of owning a car. The cost was ₹ 5.5 lakhs with an additional ₹ 20K for accessories. So, with his zero down payment, he allocated the entire amount towards the bank as a loan. He shared all the specifics of costs associated with owning a car. I cross verified all these figures in leading cars market place website “cardekho.com” and it all checked out.
I, being who I am, started to wonder what exactly the outlay on the whole ordeal was. So, I calculated EMI for ₹ 6 lakhs with 10% interest for 5 years. Moving on, I simply started crunching numbers and tried to find the TCO – Total cost of ownership. I considered car’s ownership period of 5 years with the car clocking 11K Kms a year (~30 Kms a day) at a mileage of 18 Kmpl. I was genuinely taken aback with my findings.
The overall cost of ownership and the amount of money you will be spending on ola / uber is more or less similar. Once I took this to Babu, he gave me one of the disgusted looks I could ever recall him giving. He brought a point by saying taxi cabs aren’t always available, I brought out a rebuttal saying if the car is broken down unexpectedly, not only you have to fix it with your own money but also pay more insurance the following year. He spoke about driving experience; I spoke about comfort of ride in a cab. Fair to say, we both had lot of subjective points, which made sense from each other’s perspective.
Nevertheless, one thing that we both mutually agreed was, all else staying the same, owning a car burdens you financially. Especially if you avail zero down payment facility. Using the same above boundary conditions, one can completely remove the debt from their finance if they opt for ola / uber. If you do not have money, either you can transit in public transport or you could choose to cancel the outing plan. However, once you enter into an EMI, you are obligated to pay that amount offering you little to no flexibility. I had pretty much made up my mind about not owning a car. Then came Nathan.
Smart Informed buyer with clear plan
Nathan and I go long back. It had been a while since I met him. We share the same of idea of minimalist version of life: Spend as less as possible, save as much as possible and as early as possible! Hence, I was surprised when I saw him with his all-new swift same base variant bought in Delhi. As I got out of Ola auto, before even the driver gave out customary request to give him high ratings, I inquired him. How in the world was he convinced to buy himself a car?
Then began the Nathan’s gyan and he started explaining. He did understand the financial peril and economics of owning a car. In spite of that he went ahead with it. Why? First, Nathan was in NEED of a car. By need, it was not some societal peer pressure or yearning to show off. He just loves the driving experience and his wife equally loves it.
Second, after deciding to buy the car, he set his monthly savings budget for buying car. Since his aim was to buy a car under ₹ 7 lakhs, he set aside ₹15,000 every month for RD. He chose RD as his outlook was just a year an other instruments wouldn’t have cut it. He wanted the car in mid-term and so he put RD only for 1 year.
Third, he started scouring the market to find the best deals available. He found that during Diwali, car manufacturers traditionally offered many discounts. Finally, he stuck to his process of investing in RD.Diwali then came.
Since he had been investing for a year now, he has a corpus of ₹1.86 lakhs (@ 6% p.a interest). Due to his timing of the purchase, he got a 5% discount in MRP and got accessories free. So effectively, he purchased same car as Babu did only at a lower price of ₹ 50,000.
Owing to his corpus and discount, he effectively drove the loan amount to as low as ₹ 3.65 lakhs. With this, he further opted for a 2 years loan instead of 5 years tenure, as his budget was ₹ 15,000 per month and EMI for 2 years was along the same lines. He plans to hold the car for 5 years. Now he showed me his version of TCO and his economics of owning a car.
Not only has he managed to reduce the total expense by a massive 25%, he has also ensured that he does not end up in emi obligation for more than a manageable 2 year period. His overall planning and structured approach has significantly mitigated risks associated with his purchase.
Of course, it is still financially not a great decision to invest ₹ 6 lakhs on a depreciating asset. However, emotional satisfaction, small joys of life and significant cost saving he will have compared to using ola / uber are justifiable reasons to make this purchase.
Smart work goes a long way in your big purchases
Nathan is one of the best examples of how important it is to avoid sudden impulsive buys. You protect yourself from overpaying than you had to. Also, avoid unwanted risks and commitments. Always plan your purchases well. For example, in this case, Nathan has planned for just 2 years commitment (3 if you include his accumulation of earlier corpus).
Because of this, Nathan can re-invest the same ₹ 15,000 in a decent mutual fund yielding 10% after he closes the loan in 2 years. As mentioned above Nathan spends just ₹ 3.75 lakhs more than Babu but ends up with ₹ 6.31 lakhs more assets. He will have a corpus of ₹ 6.31 lakhs at the end of 5th year. This is the difference between an unplanned impulsive buy and a planned, researched & structured buy. Always plan your purchases and plan your purchases in such a way that your debt commitments are as low as possible in terms of both money and time.