When it comes to financial needs and wants, we often feel beguiled by our desires to clearly understand the difference between the two. In that, we allow our financial security to be threatened by expenditures that may give us a temporary high but leave little budget to fulfil our core needs.
Is buying a car a need or a want? It isn’t a one-size-fits-all answer and largely depends on your intent, needs and budget. Millennials, especially, form a demographic that includes many high earners who are may have a good cash inflow every month but are not financially stable yet. To invest a huge sum in a purchase, you should be sure of the costs it will incur and if it leaves you in a secure position.
Sometimes, people buy a car out of sheer necessity and functionality. Sometimes, people buy a car to taste luxury. Whatever your intent and motivation are, it is important to understand whether you are financially ready to buy a car just yet.
Here are a few things you should keep in mind before buying a car.
1) Fix your budget
It is the first step when making a big-ticket purchase. You may feel tempted to buy a certain car but if it doesn’t fit in your budget, it will end up being a purchase you will regret. “Make sure that the entire cost of owning a car doesn’t go beyond 25 per cent of your monthly income,” advises Meghna Jaisingh, a chartered accountant and financial advisor.
2) Check the resale value of the car
The resale value of a car increases with a more powerful engine, fuel efficiency, brand, and added features. Apart from these factors, car companies that have better spare parts availability also have a better resale value. This is important to check in case you decide to sell it to buy another car or in a situation of a financial crisis. “It is important to note that since cars with a higher resale value are more susceptible to theft, the insurance cost they incur is also higher,” Jaisingh points out.
3) Secure financing before making the purchase
Many people walk into a car dealership and go for the easy financing options they provide. However, Jaisingh advises that it is wise to secure a car loan before purchasing a car, from a bank or other financial institute. “This will help you secure a loan with a lower interest rate, which is often inflated when going through a car dealership,” Jaisingh explains.
4) Choose the correct EMI duration
When choosing an EMI duration to repay your car loan, it is important to analyse what works best for you. “If you go for a shorter duration, your EMI will be higher but the total cost of your car will be lower. If you go got a longer duration, you will be paying less every month but due to the interest, there will be a significant amount of difference (can be in lakhs) in total cost,” Jaisingh points out. However, one must also keep in mind the cost of the vehicle maintenance as well as any other EMIs one may have going on. “A total of all your EMIs should never exceed 40 per cent of your monthly income,” Jaisingh says.
5) Consider the costs of maintenance
“There are three types of cost associated with buying a car: a one-time cost, an ongoing cost and an emergency cost,” Jaisingh points out. Ongoing costs can include insurance, fuel, routine, maintenance, driver salary (if required) and more. Emergency costs can include fines and repairs.
“You should analyse your cost of upgrading from using a mode of public transport to owning a car. It is the difference between how much you spend commuting using public transport every month and the entire cost of owning a car,” Jaisingh explains. She further adds, “This sum should seem a feasible amount for you, given your needs, situation, and comfort. Only then you must go ahead with the purchase.”
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