Owning a car is a dream of many individuals as a personal car provides the ability for a family to travel together and also plan your vacations without having to depend on car rental or public transport. However, the process of buying a car can be overwhelming, with a wide range of options available in different price ranges and categories. It is crucial to accurately determine your budget before beginning the car-buying process and stick to it while making a decision. This will help you find a car that meets your needs and fits your budget. It is important to carefully consider your budget and make sure you can afford the car you are considering, as well as any associated costs such as insurance, maintenance, and fuel.
While determining your budget for your new car, you should consider the following points:
Determine your surplus income: There is actually nothing as surplus income, by surplus income I mean the amount available to you after meeting your recurring monthly expenses (eg. rent or home loan EMI, house help’s salary, commuting expenses, telephone and electricity bills, grocery bills etc.) From this amount you deduct your monthly contribution towards your long term goals like retirement, child’s education, child’s marriage. The balance would be the surplus income which can be used for your car purchase. The EMI of your car loan should not exceed this amount. For the sake of this article let us assume this figure comes to Rs. 20,000
Determine the loan amount: Once you have determined your surplus income, let's consider it as your EMI amount (Rs.20,000), now is the time to use an online loan EMI calculator and determine the loan amount that would have Rs. 20,000 as EMI. I have assumed a car loan interest rate of 9% and loan repayment tenure of 4 years. As per the rule of thumb, your car loan tenure should not be more than 4 years. By plugging these figures in an online calculator you can easily determine the loan amount of Rs 8 lakh.
Down payment of 20%: You should ideally pay 20% of your car’s purchase price as a down payment although some banks offer up to 90% of your car’s on-road price as a loan. By paying 20% of the purchase price as down payment, you will be able to avail the loan at lower interest rate compared to when you only pay 10% of the purchase price as down payment. This will therefore reduce your interest burden and cost of loan. As we have already determined your loan eligibility as Rs. 8 lakh, this should be 80% of the purchase price of your car. Therefore the cost of your car should be Rs. 10 Lakh and also your budget for a new car. You should make a down payment of Rs. 2 lakh.
Timing your purchase: Now that you have determined your budget for your car, it is time to start saving for down payment. At the rate of saving Rs. 20,000 per month, you can easily save Rs. 2 lakh in 10 months.
If there is a waiting period for your car, you could book your car earlier so that you can expect delivery of your car by the time you have saved for the down payment.
Shortcut: We all love shortcuts, and here is one, you can simply multiply your surplus income i.e the EMI amount by 50, to arrive at your budget for a new car. Then 20% of this figure would be the amount you should contribute as down payment and opt for a 4 year repayment period.
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