Don’t I Need A New Car To Show The World How Successful I Am?!
Does it make sense to buy a new car and should you take a loan to buy one.
Life is good. You have been doing well at work. There is a nice promotion around the corner. The second kid has started to sit on his own now. Things are very positive. Time to tell the world that you are making a mark. Right!!
You have been eyeing that new Skoda Octavia, what better way to announce that you have arrived in life!
At 32-33 lacs on-road it is a pretty neat deal. With your well-paying corporate job, getting a loan at a preferred rate ~8.5% is quite easy.
You have done the research got the paperwork ready and have negotiated with the car showroom, they are throwing in a few accessories for free and will give you 3 free services instead of the usual 2.
All set.
But there is a small niggle, “is this a financially prudent decision?”.
After all, you now have one more little-human you are responsible for, the economy has a Covid shaped shadow over it and who knows what will happen with the next wave.
You make the mistake of pinging me on Whatsapp to ask if you should go ahead with buying the new Octavia. Maybe you are thinking about getting a used one instead.
Well, let us see what happens.
Let us make this decision together. We will leave out the emotional component completely.
If at the end of this discussion you are going to say, “but I love the smell of the new leather interior”, then please skip this one.
Buying a new car ?
Performance
With all the new technology in cars these days, I believe they are built for the long haul. Especially at the higher end of the spectrum, say like the Octavia, these can easily go upwards of 300,000 KMs and when well maintained, more than 400,000 without needing an engine overhaul.
So, in terms of performance there is no significant difference between a new car and one which is a few years old with a 100,000 KMs on the Odo.
Looks and color
Well, newer cars will always have a slightly shinier look and often companies make cosmetic changes which look good.
More importantly the opportunity to choose a color is usually better with a new car compared to a used car.
This is an area you will need to decide about for yourself, how critical is the color.
Price
The all-important question.
A new car loses a lot of value in the first few years. After that the drop in value is slower. It is not surprising to see a 20% – 30% drop in value in 2-3 years.
With a little effort you should be able to find a good 3-year-old car at 30%-40% cheaper than the new one.
“Ok, you have me convinced about buying a used car, but loans for used cars are more expensive. Wouldn’t it make more sense to buy a new one if I am taking a loan. Besides my company gives me a good deal on the loan”
Should you take a vehicle loan to buy a car?
A new Skoda Octavia costs ~32-33 lacs on road in Bangalore
A cursory glance at Bank Bazaar website shows interest rates are between 7.5% to 8.7% for most reasonable loans.
If you were to take a loan for 90% of the car value, approx. 30 lacs, for a 5 year period, at 8.7% you are looking at an EMI of Rs. 61,839.00
Side note: very impressed with the level of information on the Bank Bazaar website, they did not pester me for my phone number etc. Good stuff.
Ok, so we are looking at a down payment of ~ 3 lacs and then a monthly payment of ~62k for 5 years.
Over the 5 years you would have paid 7 lacs+ in interest for the pleasure of driving your new car.
To me it just does not make sense to take a car loan and pay so much interest.
“So, you want me to buy a used car and you want me to buy it cash down”?
(insert eye roll or suitable cuss words as appropriate)
“Even if I could find a very good used car, I don’t have 20lacs sitting around, I will just about be able to afford the 62K EMI”
What happens if you delay your gratification?!
So, my question to you- “Instead of making a statement to the world about having half-arrived, can you wait for 3 years?”
If you can afford the 62K EMI, then let us compare what happens if you put it into a Systematic Investment Plan (SIP).
Let us take the Nifty 50, no need to do extra research or effort, just use the Index.
I am looking at the data of last 3 years – June 2018 to June 2021.
If you had done a SIP of 61,839 for these 36 months, including the 3 Lacs of down payment.
Today the investment would be valued at 35,04,987.
You could easily buy a used car for about 20 lacs and still have a good 15 lacs left over. Not to mention that you can continue your SIP and grow your wealth, since there are no EMIs to pay.
Compare this to taking the loan:
Over the course of next 3 years, you would have paid ~6 lacs of interest on the loan, assuming you never miss an EMI and don’t incur any penalty or late payments.
At the end of 3 years you would have spent ~ 26 lacs (23 lacs EMI and 3 Lacs down)
And you would still owe the bank – 13.5 lacs.
You have a choice to make:
Delay your gratification by 3 years and end up with a bank balance of 15 lacs, no liability and a 3-year-old car.
OR
Get your gratification today, spend 26 lacs for the pleasure of driving the car, and still owe the bank 13.5 lacs for a 3-year-old car.
You know where my vote is!
I sincerely hope I managed to show you the benefit of delaying gratification and planning your investments and expenses.
Something that loses value as steeply as a car is not an asset, it is very much a liability. Do think through the numbers and do your own calculations before you make any decision on acquiring one.
Note: Some of these numbers will change over time and there will be deals that look attractive upfront but do the math yourself. I am willing to bet delayed gratification will always leave you better off.
