Buying vs Renting a car – Which is better option ?
Buying a car is a financial task you need to plan for. Apart from your home, a car is one of the big financial expenses you make in life(especially salaried individuals). Not planning it carefully will lead to difficulties in your finance matters. Unless you’re rich beyond your means or have other income streams
Mr. Ramesh is my neighbor in my hometown. He is an IT professional and had bought a Honda City (around Rs.9 lakh) 2 years ago. He loved his car and took great care of it. But recently when I visited my hometown, I learnt that he had sold his car.
In a casual chat, I asked him ‘Why did you sell the car?’. His reply was ‘I use it less often and the EMIs were making life a bit tough’. This is the situation with many of us when we take a quick decision and buy a car. Spending a few moments analyzing the exact usage of your car can save you much money and at SmartMoneyGoal we always urge our readers to be rational.
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A car is a mode of transportation but for some it’s a pride as well. I still do not own a car though I could afford one –Why? Because I work from home mostly and renting a car is a much better option for me. At least under current circumstances. What good is a car if I don’t need/use it often? I don’t want to own a car which will keep depreciating in value if I’m not going to make full use of it. Also I don’t want to use a car just because I have bought it. In my decisions, Utility decides purchase – not the other way around.
Buying a car – The costs involved
Indians usually purchase a car with an auto loan and many might have a home loan running simultaneously as well. A recent study by RBI found that nearly 73% of new cars bought in India are financed by institutions. So what are the costs involved?. It will be better if we broke down the costs involved to have a clear picture.
Cost of a Maruthi Swift car = Rs 8,00,000
Initial down payment (D) = Rs 2,00,000
Value of loan taken = Rs 6,00,000
Interest Rate of auto loan = 15%
Tenure of loan = 6 years
EMI amount per month= Rs 12,687
Total Principal paid (A) =Rs. 6,00,000
Total loan amount repaid (B) = Rs 12687 x 72 months = Rs 9,13,464
Total Interest paid (C = B-A) = Rs 913464 – 600000 = Rs.3,13,464
Approximate kms in life of a car (E) = 3,00,000 (best case scenario)
Assume a car gives 15 km/litre diesel (approximate average)
Cost of fuel(diesel)/km= Rs 58/15 = Rs.3.87/km
Average usage of car by an Indian who uses it everyday= 1500 km/month
Average fuel cost = Rs. 4 * 1500 km * 72months = Rs 4,32,000
Total value of vehicle @15%p.a after 6 years =Rs.2,41,376
Cost of maintenance and service of a car = Rs 25,000/year x 6 years = Rs. 1,50,000
Total cost of owning car = 200000+913464+150000+432000+432000 – 241376
= Rs. 18,86,088
Note: We have not included the opportunity cost of Rs.2 lakh paid as down-payment. Also number of kms driven per month depends on the individual & costs will vary accordingly
Renting a Car – The costs involved
With so many taxi services available in all major cities, it has become easy to rent a car. You can choose to suit the occasion. Going out with the extended family? – choose an Innova or Tavera or Xylo or bigger car. Just traveling by self or nuclear family – choose a smaller one like Indica or Ikon or Renault. Let us see the costs involved in renting a car
Cost per km of rented car = Rs. 20
Average usage for Indian per month in best case = 1500 km (Obviously few Indians may use more than that)
Cost of renting a car/month = 1500 x 20 = Rs.30,000
Cost of renting a car for 6 years = 30000 x 72 = Rs 21,60,000
Seems costly right? But wait we have not included the corpus we’ll get from investing the EMI of Rs 12,687 for 72months.
Investing your car EMI instead in SIP or PPF every month @ 8%= Rs.12,06,200
True Cost of renting a car for 6 years= Rs 21,60,000 – Rs 12,06,200 = Rs.9,53, 800
Also you get a driver FREE Cost of driver/chauffeur =Rs 10000/month x 72 = Rs.720000. We have not included this in our calculations at all. If your usage per month is going to be less than 1500kms per month than much better to rent the car.
Calculate your Loan EMI here
Pros & Cons of buying/renting a car
|Owning a Car||Renting a Car|
|Driver||No. Pay Extra cost if need a driver||Yes. This is a big advantage in a rented car|
|Approximate True Cost (based on our example)||Rs. 18,86,088||Rs.9,53, 800 without subtracting Driver benefit. If you do that, value still comes down|
|Depreciation||Fixed whether you use or not @20% for 1st year and 15% in subsequent years||No need to worry about depreciation as its included in cost/km rent|
|Maintenance||Need personal maintenance like washing, regular servicing and repairs, renewing insurance||No worry about maintenance|
|Availability||At your disposal all the time||Based on availability at taxi service. Sometimes all cars may be booked and Not available in emergency if needed. Also in some towns/rural areas, rented cars may not be available that easy or their charges are not transparent.|
|Parking||Your responsibility. In many apartments, builders usually charge for parking. Also you need to pay parking at malls,cinemas,roads||Not needed. You can disconnect the service once you get down at the location|
|Convenience/Comfort||You can add accessories, gadgets to your liking.||You cannot do any modifications to the car. It’s a simple point A to B transport service|
|Liquidity||Straps you for cash. An outgoing EMI every month and recurring expenses for fuel, maintenance affect cash flow||Positive cash flow. You use car when you have cash and when you don’t you can use other mediums of transport.|
How to decide if you should buy a car?
Well, the indications and conditions vary for individuals. So there is no one solution fits all. That is beauty of finance. Most of finance decisions are unique and what fits one may not fit another person as the best investment. Before buying a car, here are some general guidelines/questions to ask yourself
- Will you use the car atleast 2000 kms in a month on consistent basis ? Most important logical criteria to decide if you need to buy or rent your car. Based on our experience we find that the favor tilts from renting to buying a self-driven car somewhere in the 2500-3000 km range usage per month for normal cars.
- Can you pay 30-40% of your car value as down-payment ? Or better can you finance it 100% ? Lesser the loan amount and shorter the loan tenure – the better.
- Is your car EMI+ fuel, maintenance costs less than 25% of take-home salary ?
- Do you have any personal loan or other high interest loan? – If yes, then a car loan is a strict NO for now.
- Is your overall outflow of all EMIs (including car loan) less than 50% of take-home salary?
- Do you self-drive or hire a driver/chauffeur? If you prefer a driver/chauffeur, renting is better option financially.
- Do you have an emergency fund and adequate term, medical insurance for family? If not, first get them. A car can WAIT!
- Is buying a car an emotional/prestige decision or based on need?
If buying a car is an emotional decision then I don’t want to make a comment. Many things are important emotionally to an individual. You can’t put a price tag on which you desire emotionally. After all what is life if you can’t enjoy reasonable pleasures what you desire? Also one can’t determine universally how much price tag an individual is willing to put on his comfort level.
But you must also take care that it does not affect your finance and peace of mind as its a long term investment . A car is a depreciating asset and so you must be careful in deciding if you really want to commit a big amount to it. Once you buy your car, make optimum use of it. It will depreciate @15% regardless whether you use it or not.
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