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Preparing to buy a car

Buying a car is always a proudmoment and a big-ticket expense too. Financially, it is just a notch below buying a home. However, with proper planning, owning one can be a smooth drive. If you are not short of funds, it’s better to buy your car on cash. Otherwise, you may approach a bank or a nonbanking financial company (NBFC) for a loan and then buy the car of your choice after the loan is approved.

HOW MUCH WILL IT COST

The first thing will be to fix a budget. Prices may jack up at the last moment by anything upwards of `50,000. So, keep that buffer in consideration while deciding on the models. Then compare the prices of different models. However, there could be a possibility that your chosen model might have been officially called off the production line and updated with a newer version by the time you actually go and buy the car.

ESTIMATE

It makes sense to get hold of the monthly outgo on the loan beforehand. Note down the price of the car minus the downpayment you make and then divide the remainder by the loan tenure. That will be your rough equated monthly instalment (EMI) minus the interest on the loan. Besides interest, there will be other costs on insurance, fuel and maintenance. If you can afford all of that, only then take a car loan.

TAKING A LOAN

A good rule of thumb is to estimate 15 per cent of the car’s cost as the downpayment, as banks typically do not extend loans in excess of 85 per cent of the ex showroom value of the car. The optimal loan period is 48 months (four years) and extendable up to 84 months (seven years). It’s better to keep the loan period short to minimise the total interest outgo. Banks, typically, give loans on the ex showroom price of the car, which excludes registration cost and insurance charges. A loan is always disbursed on the basis of one’s income and the ability to service the EMIs. For example, a car loan of `4 lakh for 60 months will entail an EMI of about `8,697 at 11 per cent interest.

SAVING

Ideally, give yourself 2-3 years to save up for the downpayment unless you have already done the saving. Start saving for at least 20 per cent of the ex showroom price of the car. With time horizon not ideal for equity exposure, start investing in systematic investment plans (SIPs) in balanced funds, which, typically, have 65 per cent exposure to equity and the rest to debt. Choose not more than two balanced funds and, preferably those that have performed consistently well over the longer duration. About 6-9 months away from your goal, stop the SIPs and move your accumulated corpus into debt funds. For e.g., if you intend to save `3 lakh as downpayment, an SIP of about `7,000 will be required at an assumed growth of 11 per cent per annum. When the time comes to start paying your EMIs, you can divert funds from your SIP.

CONCLUSION

Do not take a personal loan to buy a car as such loans come at higher interest rates. Also, do not liquidate existing investments to arrange for the downpayment of the car. Lastly, keep in mind the monthly household outflow and do not try to stretch your budget.

Next To Come: Achieving Your Goals