NEW DELHI: Auto loans have made expensive cars affordable. Auto loans increase affordability, but it’s always best to budget based on income and debt.
For the most part, buying a car is the second most important buying decision after a home. However, it is a depreciating asset, so it is prudent to spend what you can easily afford.
Here are a few ways for you to decide on affordability.
Two rules that can help you come to a budget. First, don’t spend more than half of your annual income on a car. Suppose your annual income is Rs10 lakh. Your budget for the vehicle should be around ₹5 lakh.
Don’t worry if you have to consider net income or gross income. It is entirely up to you. However, decide on the budget based on the road price of the car – not the price of the showroom.
The other rule helps you decide on the budget if you take out a loan to buy the car. According to the rule of thumb of 4/20/10, you should be able to pay 20% of the road price as a deposit. The loan term should be for a maximum of four years and the equivalent monthly payment (EMI) should not exceed 10% of monthly income.
To better understand the rules, let’s look at some examples. Suppose your annual income is Rs12 lakh, your vehicle cost should be less than Rs6 lakh.
Based on the second rule, you should offer Rs1.2 lakh as a down payment, and the EMI should be around Rs10,000. In this case, you will need to take out a loan from ₹4.8 lakh for four years. Right now, most lenders are offering auto loans from 7.5-8%.
If you take a ₹Loan of 4.8 lakh for four years at an interest rate of 8%, the EMI will be ₹11,718.
Will it be safe to pay a higher IME than the rule of thumb suggests? Rules of thumb are guiding principles – they are not set in stone. It’s up to you to decide what’s best for you.
HOW TO RESPECT THE BUDGET
You have several options to stay on budget. Maybe you get a bonus that can support slightly higher EMI.
By following the same example, you can also go for a cheaper model. Instead of buying a car which costs Rs6 lakh, you can choose a car which costs ₹5 lakh. The 20% deposit will be ₹1 lakh, and the EMI for one ₹The loan of 4 lakh will be ₹9765.
Another option is to increase the deposit. Instead of paying 20%, you can pay a third of the cost as a deposit – pay Rs2 lakh instead of ₹1.2 lakh.
Depending on your preferences, you can also buy a used car instead of a new one.
The idea is to spend according to your financial capacity rather than stretching the budget just because a loan is available.
(Do you have personal finance questions? Send them to [email protected] and get answers from industry experts)
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