Buying a car

In this post I look at the real cost of buying a car. I hope this would help people make a better decision regarding allocating the budget for a car. For the current analysis, I am looking at a car that costs around Rs 5,00,000.

Major cost factors

Fuel costs

We begin with a head that is most obvious - the cost of the fuel that goes into driving. While the cost varies significantly with the usage, it will typically be in the range of Rs 4,000 to Rs 10,000 per month. Generally, diesel will come out cheaper by around 30% as compared to petrol and CNG will be 50% cheaper as compared to petrol.

Insurance and maintenance

If comprehensive insurance is opted for, it will require around 25,000 per year. Further, annual maintenance costs (servicing, mandatory deductibles) will come to approximately the same - i.e. Rs 25,000.

Depreciation

If the car is sold after seven years at 50% of the purchase price, the annual depreciation will come to around Rs 35,000.

Interest

This is a component that is often missed. It is sometimes believed that if depreciation is accounted for interest is not required, but that is not the case. True, the depreciation is not a cash expense and so it should be considered to reduce the interest expense. Accounting for it will lead to an annual interest expenditure of around Rs 35,000 as reasonable interest rate of 12% per year.

Total

The total cost comes to around 1.5 to 2 lakh per year. Importantly, the fuel cost is just half to one third of the total cost.

Rules of thumb

With respect to a car, I use the following rules of thumb

1. 20% of the cost of car is the annual fixed cost. The fuel costs are extra.
2. Car cost should not be above 5% of your take home pay. Thus, your car budget should be three times your monthly pay.
3. For monthly usage of less than 2000 kms, it does not make sense to buy a diesel car.

Happy driving!