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Personal finance series : Car – to buy or not to buy

It has been a long time since I posted. The last article in the personal finance series was Personal finance : Why you should be using credit cards

For the last month or so, I have been thinking about buying a car. Though buying a car is always an emotional and aspirational decision, that is not a reason to ignore the long-term financial aspect of such a decision.

Though based in Germany, the basic considerations for buying a car are pretty similar across the world. Struggling with questions such as following is part of making a final decision :

  • What is the mileage?
  • Whether to go for :
    • petrol or diesel cars,
    • sedan or a SUV,
    • power or comfort,
  • What are the maintenance costs for the car?
  • Whether to go for performance or economy car?
  • How long will I want to keep the car?
  • What is the resale value of the car?
  • How easy is it to resell the car?
  • What is the ownership feedback for the car I am planning to buy?
  • How will my family considerations change in future (couple now v/s family in next years)?

These are the questions that I have also been wondering about recently. While these are not easy questions to answer, there are some aspects of car ownership which can not be argued upon :

  • The pride of ownership,
  • The convenience of car ownership,
  • The freedom of movement, for city drive and those weekend trips,
  • The family getaway memories on road trips,
  • The late night dhaba trips with friends,
  • The safety of driving in a car,
  • Coming home from parties, extending the celebrations with a drive.

All of these are highly relevant and important facts…..all this is even before I have even made a single test drive or even narrowed down on the final 2-3 cars that make the cut.

Now, you must be wondering where is the financial aspect of this decision, apart from the initial down payment or the monthly EMIs, for the loan for the car.

Well… good that you asked. Here are my 2 cents… these may or may not be topics that others think about…. :

  • Can I afford a car :
    • annual salary :  ₹10,00,000
    • aspirational car cost : ₹ 8,00,000
    • Is it an affordable decision?
  • How much loan should I take :
    • car cost : ₹8,00,000
    • loan amount : ₹5,50,000
    • repayment period : 7 years
    • Is financial slavery a good decision for 7 years?
    • what if you invested this EMI amount as a SIP in MF or in stocks …. will it be more than ₹5,50,000 in 7 years??
  • Which model to buy :
    • basic model : ₹4,00,000
    • mid range model : ₹5,00,000
    • high-end model : ₹6,50,000
    • which model suits your financial pocket?
  • To buy a new or old car (assuming that the pre-owned car is in an acceptable condition) :
    • new model : ₹4,00,000
    • 2 years old model : ₹3,00,000
    • Is “New” car really worth it or should you consider pre-owned cars?
  • Petrol or a diesel car :
    • Petrol car : costs ₹4,00,000; mileage : ~15kmpl
    • Diesel car : costs ₹5,00,000; mileage : ~20kmpl
    • what are the running costs for a car for a year (initial costs, petrol/diesel costs etc….there are tons of automotive websites to go deeper in this topic. The ones I use are Carwow or Team-bhp).
  • Maintenance costs (assumed) :
    • Indian cars (Maruti, TATA etc) : ~ ₹6,000 per annum,
    • Asian cars (Honda, Toyota etc) : ~ ₹9,000 per annum,
    • German cars (Mercedes, Audi, BMW etc…) : ~ ₹20,000 per annum,
    • On top of EMIs and fuel costs, which costs can you afford for the whole year?
  • Insurance costs :
    • Small car : ~ ₹10,000 per annum,
    • Mid range car : ~ ₹14,000 per annum,
    • High end car : ~ ₹20,000 per annum,
    • Did you think of the annual insurance costs while finalizing your “dream car”?
  • Depreciation (not an upfront cash costs, impacts resale value) :
    • at least 10% – the moment the car is drive off the showroom floor,
    • another 20% -30% in the 1st year,
    • Financial loss : on a small car of ₹ 4,00,000 that is almost ₹ 1,20,000 in the first year itself.
    • Meaning : even in the best of condition, the car is worth only ₹ 2,80,000 from 2nd year on.

*all the costs are assumed to convey the meaning, the actual costs will vary in the real world, based on different factors.

These might have been a very exhaustive list of questions and considerations to think about. But, this thought process is what makes the investment/financial decision worthwhile in the long-term. 

In my case, this decision is further complicated. 

Within city travels : 

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I am member of Drive Now and Car2Go car-sharing clubs in Germany. These allow me to use the car (MINI, BMW 1-series. BMW i3 and Mercedes A-class, CLA, GLA and Smart cars) on a pay per minute basis. The benefit of these clubs for me is : 

  • No investment costs :
    • to buy the car,
    • to insure the car,
    • for annual road tax,
    • for car inspection, 
    • for any damages (limited to 350 EUR),
  • One time registration costs with the driving clubs,
  • No service and maintenance charges, 
  • No parking costs (they can be parked anywhere in the city within their business area),
  • Available in multiple European countries and even in Canada,
  • The best and newest cars of those models, 
  • No worry about changing to winter tires, 
  • Can be hired on an hourly and daily basis. 

So, to put it in simple terms, city drive for me is not an issue, when I need it. Based on the number of people I travel with, I can pick a big or a small car. 

Road trips : 

pexels-photo-811034

I love driving in Germany and Europe. Autobahns (Highways) in Germany with no speed limit and responsible drivers make the driving experience enjoyable for all. I can just put my foot down and get the engine to do what they are built to do. 

The only issue is that the more scenic drives are in the South Germany, covering the Alps and amazing lakes. Being based in Berlin, it is about 600 km to just reach there. Hence, the better option for me is to take a flight to Munich and pick up a rental car. With companies like Avis, Europcar, Enterprise, Hertz, or RentalCars (for a choice of cars & price) competing for my business, it is always fun to get good deals.

The benefits of renting car from these companies are :

  • I get the best cars in the class that I book (with a possibility for a free upgrade),
  • I can rent for car from a day to a month, any time limit,
  • The cars are in best condition, clean and safe to drive, 
  • I can opt for accessories that I may need – navigation, roadside assistance, insurance etc,
  • The cars are easy to pick up and return,
  • Till date, did not have payment or excessive charges issue with the companies, 
  • Earning loyalty points with the car rental companies,
  • Earning miles on my Lufthansa Miles & More account, 
  • Personally, I get to drive a lot of different cars and evaluate if I will like to own that car. 

Now, this lands me in the current situation. Since my city driving and road trips are covered, does it really make sense to buy a car? By a rough calculation, it will cost about 200 EUR (insurance, taxes and parking) per month for me to just park my car!!

What do you think I should do – buy or not buy a car? Your comments below will help me make a more financially responsible decision….. thanks for reading. 

 

Feel free to share more thoughts/feedback with me at financialblogger12@gmail.com

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Personal finance series : Is this your household?

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