As youngsters, owning a car is something we all dream of and want to be able to do. A car is the perfect expression of freedom. Right from the days we step into our earning years through first job, new business or profession, we yearn to become the owner of a car which can be our travel partner. However, in our quest to own a car, we are often stuck in the confusion of whether to take a loan for it or fund it entirely from our own savings. While there is no right or wrong answer here, let's make things a notch simpler for you by answering some of the questions and digging into mathematical calculations surrounding this decision.
While the ultimate cost would vary as per the chosen car,model, color, fuel type, location etc., let's assume a scenario to give you a fair idea. You decided to own a hatchback car in the city of Gurugram. The estimated costs involved in purchasing it without a car loan, turn out to be as follows.
Ex showroom price of the hatchback car- Rs 5.85 lakh
RTO charges (Road tax)- Rs 30,900
Car Insurance premium-Rs 27,600
Others (Fast tag)-Rs 500
Estimated on road price to paid by you to purchase the car-Rs 6.44 lakh
Let's assume you aim to use this hatchback car for 5 years.The estimated costs to be incurred on maintaining and running it.
Expected total annual service cost for 5 years- Rs 21,945, Estimated mileage of the car-23.2 kmpl
Fuel cost per month (assuming you commute to work for 23 days per month for below mentioned distances, petrol price taken as Rs 95.88 as on 23.11.2021 in Gurugram):?
If driven 20km per day- Rs 1,901? ; If driven 50km per day-Rs 4752
Lets look at the expected total money you would have shelled out on office commute in 5 years since the purchase of the hatchback.
If driven 20km per day for 5 years-Rs 1,14,060 fuel cost + Rs 21,945 (Service cost) + Rs 6,44,000 (On road price)= Rs 7,80,005
If driven 50km per day for 5 years-Rs2,74,320? fuel cost + Rs 21,945 (Service cost) + Rs 6,44,000 (On road price)= Rs 9,40,265
Most banks offer up to 85-90% of car¡¯s on road price or ex showroom price as car loan, implying that at least 10-15% of car¡¯s cost is likely to be borne by you in the form of down payment. While a few banks tend to offer up to 100% finance,especially during festive season, let¡¯s go ahead with the usual norm of getting around 85-90% of your car¡¯s cost as car loan, to help you with further estimations and calculations.
While the 100% finance option offered by some banks can seem to be a lucrative option, given that you don't need to pay any down payment to own the car, the main caveat lies in the fact that the higher loan amount you take, the higher your total cost would be, including the interest payout. So, before jumping onto the 100% financing option, remember that you would have to pay a higher interest cost on the bigger loan amount taken by you, which ultimately also has to be repaid in the form of bigger EMIs. Hence, if you have the financial capacity to pay some down payment, then you should try and do so, as this helps in lowering your overall loan cost and lead to? smaller EMI as well.
Assuming you decide to purchase the same hatchback mentioned earlier) on-road price of Rs 6,44,000), but this time with the help of a car loan. Here¡¯s what the calculation can turn out to be:
Down payment (assuming you gave 15% of on road price) - Rs 96,600
Loan amount (On road price minus down payment) - Rs 5,47,400
Assumed interest rate - 7.50% p.a.
Tenure - 5 years
Processing fees (assumed, varies lender to lender)-0.5% of loan amount=Rs 27,370
Estimated other charges (like documentation and registration certificate collection)- Rs 1,000 (widely varies lender to lender)
EMI - Rs 10,969
Total cost of the car loan (Principal + Interest + processing fees and other charges) - Rs 6,86,496
Total paid to own the car (down payment plus car loan total cost) - Rs 7,83,096
Assuming rest of the commute charges and service cost as same, the expected total money you would have shelled out towards office commuting in 5 years since purchase of the hatchback car with the help of car loan,would be:
If driven 20km per day for 5 years -Rs 1,14,060 fuel cost + Rs 21,945 (Service cost) + Rs 7,83,096 (Cost of car purchase with the help of car loan)= Rs 9,19,101
If driven 50km per day for 5 years -Rs 2,74,320? fuel cost + Rs 21,945 (Service cost)? + Rs 7,83,096 (Cost of car purchase with the help of car loan)= Rs 10,79,361
Its pretty obvious that owning a car with the help of car loan turns out to be much more expensive, given the interest cost attached to loans. For the 5 year period that we assumed, you would have to shell out around Rs 1,39,096? in both cases, which is the interest cost coupled with other applicable charges.?
So, while on one hand, owning a car with the help of car loan relieves you from the burden of paying the amount in lump sum to purchase the car but? comes with higher overall cost. On the other hand, owning a car without car loan involves much lower cost but requires you to pay the entire cost in lump sum. Hence, in purely mathematical terms, owning a car without car loan is the clear winner. However, as we said earlier, the choice rests in your hands. If you prefer to have the convenient way out by taking a car loan and just paying the margin money and EMIs, despite having to incur a high cost, you can go ahead with it.?
Whereas those who have the financial capacity to pay lump sum and own a car, can certainly go ahead with this option. Irrespective of your decision, keep in mind to not go overboard and end up owning a much expensive car whose repayment and maintenance turns out to deeply hurt your pocket. That way, your decision to own a car can backfire and lead to higher expenses and loss of peace of mind, which is certainly no one¡¯s aim behind owning a car.
Also Read:??Does It Make Sense To Buy A New Car Or Just Uber Everywhere
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