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For Today’s Jannat, No Car is Real Pyaar Date: July 27, 2018

If you are a movie buff and love hindi movies, there is one interesting movie that you should watch and that is Jannat. It is not interesting because of Emran Hashmi but because the movie presents a wonderful take on the life of an ambitious young man who becomes a successful bookie and eventually, lands up in trouble.

There is a scene wherein Emran Hashmi is extremely keen to buy a car for his potential girlfriend and gets into betting. Here is the simple dialogue:

No Car, No Pyar

While this is a very passionate dialogue and apt for a movie, we have a slightly contrarian view to the same. Don’t believe it? Well here is a story with some numbers:

The other day my good friend sent me some images of a car that he was looking to buy. It was a pre-owned one, though not very old and not driven much. I was impressed with the financial acumen of my friend as he was getting a good price for a car that was just over a year old.

Now, cars depreciate quite rapidly in the beginning. This is why buying a used one makes more financial sense because the original owner has taken much of the depreciation hit. But even then, does buying even a pre-owned car in today’s world makes sense? I think not.

Let’s assume that you are buying a pre-owned car worth INR 500,000. You have INR 100,000 in disposable cash, so you will be taking a loan of INR 400,000. Used car loans in India can carry an interest rate anywhere between 11% and 16%. I’ll be taking the mid-point of this range for my calculation, which is 13.5%.

At this rate and tenure of 5 years, my friend will be paying an EMI of INR 9,204. But this isn’t the only cost that you’ll pay when running your car. Assuming that my friend’s monthly run is 500 kilometers, he will incur at least one rupee per kilometer in maintenance costs. At the same time, assuming that the car returns a fuel economy of 12 kilometers per liter in a city such as Mumbai, the car will be guzzling nearly 42 liters of petrol.

At the current petrol price of nearly INR 84 per liter in Mumbai, his monthly outlay on running the car will come in at just over INR 3500. In all, my friend will be paying nearly INR 14,000 for EMI, petrol, and maintenance costs. This excludes unforeseen expenses such as accidental repair, traffic fines, parking charges, etc.

Additionally, in case someone doesn’t know how to drive (as in the case of my friend), he will be shelling out at least INR 15,000 in a city such as Mumbai for a chauffeur. As such, the costs of running a car with a chauffeur will be closer to INR 350,000 a year, while if you drive on your own, they will come close to INR 170,000.

By comparison, if my friend decided to be wise and uses a mix of public transport such as ride-hailing services such as Uber and auto rickshaws, he would save a lot. In fact, when I asked him how much he spends on Uber every month, the answer was in the ballpark of INR 8,000 to INR 9,000. This isn’t surprising as Uber generally charges around INR 20 per kilometer in a city like Mumbai.

So, even if he was doling out INR 10,000 a month on ride-hailing services, he would have saved anywhere between INR 4,000 and INR 19,000 a month depending on whether he knows to drive or not (in this case the latter figure is true as he doesn’t). But wait, I haven’t taken into the account the opportunity cost.

Had you invested the down payment amount of INR 100,000 in an index fund, you would have been way richer. The BSE has grown at an annual pace of 15.5% a year from 1979 to 2017. Investing INR 100,000 in a fund that tracks the BSE for a period of five years would give you just over INR 205,000. But you could make much more than this by investing the amount that you save every month by not buying a car into systematic investment plans (SIP).

Assuming that you start a SIP of INR 4,000 a month for a period of five years, and get a conservative return of even 12%, you would be sitting on nearly INR 330,000 at the end of five years. In all, after five years, your bank account would be richer by more than INR 500,000, but if you would have bought a car worth INR 500,000, you would have ended up paying around 840,000 at least.

This is nothing but wealth erosion. Of course, buying a car makes sense for a lot of people, but in certain cases, like in the case of my friend who stays in a city with proper conveyance facilities, it doesn’t. So if you’re looking to buy a car, make sure you do the math first, or leave it to experts like is to work it out for you.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of any agency, organization, employer, or any company. Fintuned Co. LLP shall not be held responsible in any manner whatsover, for any decision/action taken by readers on the basis of the content mentioned in the article. Readers are requested to exercise their best judgement before taking any decision/action. Fintuned Co. LLP shall also not be held responsible for any copyright infringement committed by the author in the process of writing and/or publishing this article and in the event any such offence is found, cooperate with necessary authorities to take remedial action

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