An Insight Out ….
Car, a medium of travel … is that so !!!
For many, it’s a matter of pride. And why not !!!, it’s your childhood dream to own one. So you got your 1st salary & to show your relatives & friends that you are well off, you deciding to buy a car. But do you have sufficient money !!!….
The answer to this is OFF COURSE . Car loan agents are running after you to give loan & that too with the lowest EMI.
WAIT !!!!…, it’s not about how much emi you pay, at the end what matters is your Financial Independence. Once you are trapped in the emi game, it’s hard & very expensive to get out of it.
An example will help you better understand the whole trap:
Five years back, monthly salary of Mr. Sushil was Rs.35,000 pm. After meeting his regular expenses he was left with Rs.15,000 pm. He was saving close to 43% of his earnings. His total savings was Rs.2,00,000. So far so good.
One day his close friend Mr. Pandey bought a brand new car. So Mr. Sushil thought if he can, why not me !!!….So he also decides to buy a car & the logic was, who knows how much money I have in my bank a/c, people will see in which vehicle I travel. Without having any need to buy a car he decided to go ahead.
He gave Rs. 2,00,000 as down payment ( from his savings) & took a loan of Rs.5,00,000 @ 12% rate of interest per annum. EMI for 5 years in 60 equal installments comes out to be Rs. 11,122 pm .
If Rs.2,00,000 was invested in a Fixed Deposit at a reasonable rate of interest @ 8.5 %, the amount after 5 years comes out to be Rs.3,00,731. Also if emi amount of Rs.11,122 was invested systematically, the amount after 5 years would be Rs.827,948.
And how can you forget the annual maintenance cost + insurance that comes out to be approx Rs. 2000 pm. If the same amount of money was saved every month, than assuming a reasonable rate of interest of 8.5 % per annum, the corpus after 5 years would be Rs.1,48,885.
Taking 15 % as the rate at which the car depreciates, the market value of car after 5 years comes out to be Rs.3,65,405
Adding all the Highlighted figures gives you the amount Rs.12,77,564. If 5 years back Mr. Sushil did not made the mistake of buying a car than the wealth accumulated would be Rs. 12,77,564 . But actually rite now he has only Rs. 3,65,405 (depreciated value of car) & the value will keep on depreciating at the same rate.
So the conclusion is, it’s better to save money 1st and then buy a car.
Though I strongly oppose buying a car on loan, buying a home by taking a home loan is highly recommended. A simple reason for the same is that while car is a depreciating item, value of home appreciates with time.
So if you were confused about buying a car first or a home first by taking a loan, now you know the answer.