There are plenty of cars out there in the market with more than a handful still waiting to be launched. If you look around, you may come across some amazing discounts offered by dealerships, especially during the festive seasons. And with a wide variety of Car Loan offers available at your fingertips, owning a car has never been easier.
Additional Reading: 7 Things To Consider Before Applying For A Car Loan
2016 saw the launch of many amazing cars across different segments. Some of the notable ones were Tata’s Tiago, Toyota’s Innova Crysta, Maruti’s Vitara Brezza and Hyundai’s Elantra.
Since the Seventh Pay Commission came into force, and the ban on diesel vehicles was lifted in Delhi, people have been gearing up to make big purchases when it comes to cars. But, the only problem has been which one to buy. With a wide variety of choices out there, it becomes even more difficult to decide.
If you want to take a peek at what was hot last year you can check out some of the best cars of 2016 right here and if you’re in the market for a compact sedan, you can check out the best ones here too.
Additional Reading: Watch Out For These Cars In 2017
When it comes to deciding which car to buy, we often tend to base our decisions solely on the price of the car. However, there are other factors to take into consideration as well. Read on to know more.
Real Cost Of Ownership
What’s the first thing to do once you have decided to buy a car? Simple. You need to figure out your budget. Once your budget is set, you can then look at the cars available in the market that meet your budgetary constraints.
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The general rule of thumb when drawing up your budget is that all your debts put together should not be more than 60% of your gross annual income. So, if your gross annual income is Rs. 6 lakhs, then the price of the car you wish to buy should not be more than Rs. 3.6 lakhs. However, you must keep in mind that apart from the purchase price, there will be other costs as well, especially if you take out a loan.
The next step is to calculate the real cost of ownership. This doesn’t necessarily have to be accurate. A rough estimate should suffice. This calculation will have to include the EMI you’ll be paying every month along with the total interest payable, registration tax, road tax, monthly fuel expenses, insurance premium, and maintenance costs.
Once you’ve taken all these costs into consideration, you need to check whether your finances are in a position to take on the additional expenditure.
Tip – If you are planning to take a Car Loan, then it’s probably a good idea to make a down payment. This will lower your monthly EMI amount.
Additional Reading: 9 Tips To Manage A Car Loan
How To Finance?
We assume that you’ve already decided which car you’re going to buy. Now it’s time to think about how you’re going to finance it. We’ll give you three financing options so you get to choose the best one for yourself.
Option 1: The car you’re planning to buy comes with a low price tag. You pay for it in full, provided you have sufficient funds to spare. But, why is it a good idea to pay in full instead of taking out a Car Loan?
For starters, a car is a depreciating asset; it loses value over time. Actually, a part of its value is lost the moment you drive it out of the dealership. Secondly, you can use the EMI amount that you would be paying every month to realise other financial goals such as your child’s education or marriage.
What should you do if you want to pay for your car in full? For starters, plan your purchase in advance. Save and invest money in different investment products till you have enough to make the purchase.
For instance, let’s say you are planning to buy a car that will cost approximately 5 lakhs in three years. If you invest Rs. 11, 600 every month in a balanced fund (through SIP mode), which provides around 12% returns, it should be quite easy to accumulate the desired amount to make the purchase.
Additional Reading: Mutual Funds – SIP It Down And Feel Good
Option 2: You don’t want to wait. You want to purchase the car right now. But you don’t have sufficient capital to make the payment in full. What do you do? You can’t do anything other than taking out a loan.
But, should you acquire the loan from a bank or a dealer? Ideally, you should first approach your bank for a loan. Why? Because it is more than likely that your bank will offer you better interest rates since you already share a good relationship with them.
Now, assuming that you’ve decided on the loan amount, we suggest that you make a down payment. Paying 20% of the purchase price upfront is a good option to cut down on your monthly EMI amount.
If you want to properly plan your finances, you need to keep your monthly EMI less than 15% of your monthly take-away income. That said, your total monthly EMIs (not just your Car Loan EMI) should not exceed more than 40% of your income.
Also, you should try and cut down on your loan tenure. Usually, the tenure is five years, but cutting it down to three or four years is a smart move. We recommend repaying your Car Loan as soon as possible since there are no tax benefits attached to it.
Additional Reading: BankBazaar’s Car Loan EMI Calculator To The Rescue
Option 3: What about taking a loan from the dealer? It isn’t really a bad idea. However, you need to spend some time to find a good dealer if you want to save big on your purchase. You’ll need to spend a lot of time talking to different dealers if you want to get the best deal.
Negotiating with dealers can often get you a good deal, especially if you opt for a loan with them. This is because dealers usually get an income from it.
Next, you will have to decide whether you want to go for ‘EMI in advance’ or ‘EMI in arrears’ for your loan. With the EMI in advance option, you pay one EMI to the bank and they deduct this amount from the loan they give to the dealer.
The positive side of this option is your principal loan amount is reduced, which means your EMIs reduce as well. With the EMI in arrears option, the bank disburses the entire loan amount to the dealer since no advance EMI is paid by you.
Additional Reading: 5 Tips To Help You Pay Off Your Car Loan Faster
Now that you know about the options available to you, you can make an informed decision based on your financial situation.
What Features Should You Look For In Your Car?
This is very important especially if you are not planning to change your car every other year (which we don’t think you will be doing). So, should you opt for the base model (because it is cheaper) or should you go in for the top-end variant (because it comes loaded with features)?
Ideally, if you are making an investment, you should choose the top-end model. These come with a lot of features that a base model may not be able to upgrade to. For example, you probably wouldn’t be able to upgrade from manual transmission to automatic later on.
However, not all features are necessary. For example, you could do without the navigation feature since your smartphone can do the job for you. However, you need to give importance to features such as airbags, reverse parking sensors, etc.
But, what if you can’t afford to go in for the top-end model? Well, a little bit of compromise shouldn’t be an issue. You can opt for a mid-variant model and upgrade it with the features that you think are necessary. Sounds like a good idea, right?
Additional Reading: Top 5 Cars With Great Resale Value In India
What About Car Insurance?
Sadly, you don’t get discounts on insurance. But, existing car owners can reduce their premium if they transfer the No Claim Bonus from their existing vehicle to the new one.
Additional Reading: All About No Claim Bonus In Motor Insurance
Here are a few other cost-cutting measures that you can use:
- Time your purchase – Buy your car either during the festive seasons or during specific months like December (end of the year) or March (end of the financial year). These are the times when dealers offer jaw-dropping discounts.
- Choice of car – Opt for a car that is not on a waiting list, or go for the not-so-popular colour variant or a specific variant. These can fetch you better deals than others.
Secret Tip – Buying a car in December (end of the year) reduces the resale value of the car.
Additional Reading: Buying a car insurance policy online is as easy as ABC. See for yourself!
What’s The Real Cost Of Ownership Of The Car?
The purchase price of the car isn’t its real cost. If you take a period of five years into consideration, there are many other costs that you’ll probably incur.
Along with Car Loan repayments and interest charges, there will be other costs such as cost of fuel, registration charges, road taxes, maintenance costs, and insurance cost. Calculate all of these and you will get an estimate of the real cost of ownership of your car.
Besides, your car’s value will depreciate over time. Almost 10% of its value will be lost when you drive it out of the showroom. A further 30% to 40% depreciation happens within the first year as well.
Other additional costs that you’ll incur include repair costs, cost of accessories (if you upgrade your music system or customise your car with new body kits, alloy wheels, etc.), and miscellaneous costs such as tolls, parking tickets, etc.
Additional Reading: Buying A Car? Know Your Insurance Premium
So, the next time the salesperson tells you that your car comes with affordable monthly EMIs, remember that EMIs are just a part of the total cost of ownership. You’ll be spending a great deal more on your car. A car, in its truest sense, is actually an asset, rather than an investment.