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I remember a time roughly 15 years ago when I moved to Mumbai. Before that I’d never lived in Mumbai and only visited once very briefly. Mumbai is maximum city and the hustle-bustle of every street made me feel a bit lost.

I had a daily commute of about 20 km to work; from Bandra to Nariman Point. Remember this is 15 years back, the famed Bandra Worli Sealink wasn’t there to ease out the congestion on this route. In Mumbai, for such long travel, well-wishers suggested that hiring a driver is a must. I insisted though that I wanted to drive myself.

You see, I was more used to driving in New Delhi, with its circular routes and wide roads. The undeviating, straight-line routes in Mumbai were confusing me no end.

Of course, no sooner had I started on this self-driving journey, did I realise that the others were right; the two-hour commute in Mumbai traffic was nothing short of a nightmare.

However, I was grateful to have my own car. Mumbai monsoons can make the nightmare worse, as can waiting for the precious kaali-peeli (no app-based cabs in those days) in peak office hours.

Fast forward to today, living through this pandemic, I continue to be grateful to own a private car. I know Mumbai routes now and am super comfortable driving through with or without a driver. The other positive change is that we live close to work, but that’s an anecdote for another blog.

Seeing how fast COVID infections spread and the impact of severe lockdowns, there were times when no one could rely on the availability of public transport. Even now, those who are in fragile health would do better to avoid travelling by public transport till this pandemic is declared as over.  

The decision to buy a car is well aided by the presence of several lenders willing to give you a car loan, however, you will still need to figure out costs like the down payment, insurance and registration.

No matter what your budget for the car, you can save enough if you plan well. Here are five steps to help you save for a car loan.

Step 1 – Do your car research well

The car market is flooded with models at various price points. You can buy a small-sized car for anywhere between ₹3-3.5 lakhs in India and a medium-sized hatchback for say ₹5.5-6 lakhs. However, this is just the cost of the car.

There will be taxes, insurance, registration (differs state-wise) and additional costs of any accessories you want to add. Plus, each car will have a few variants to choose from.

If you are taking a loan, the interest cost will get added.

You may like a certain model of a car you want to buy, however, until you check whether you can afford to buy (or pay EMIs) for the on-road price of the car don’t get tempted by it. Do your research not just about the car model and variant you would like to buy but also the other add on costs and interest costs if taken on loan.

The research doesn’t end here. How do you know whether you can afford the car you would like to buy?

If you are buying outright, make sure not to empty out your savings and use only 20% of your overall savings for this purchase.

If taken on loan, ideally don’t let your car EMI exceed 10% of your monthly income; in fact, try to keep it at 8% and stretching it only if you are sure to increase your income soon. Anything beyond 10% is really in the unaffordable territory; which doesn’t mean that you can’t pay the EMI, rather, paying such a high car loan EMI will leave you with very little for other lifestyle spends.

Step 2 – Calculate the down payment

Once you have done the homework and know what you can afford to buy, also affirm whether it is going to be on loan or as an outright purchase. If on loan, you will have to work out the down payment which is a lump sum expense. The car dealer can calculate the minimum down payment needed for a car loan. However, it is your choice how much down payment you would like to give.

Higher the down payment, lower the loan funding and lower will be the interest cost you pay over the loan tenure. Loan tenure for car loans usually vary from 4,5 years to 7 years. It is not necessary for you to maximise the loan amount or the tenure if you don’t need to.

In case you have already managed to save for 50% of the car cost, then that should be your down payment.

You may also decide that you don’t want to fund your car purchase with a loan, in which case you will have to save the entire amount required to buy the car. For some people, it’s always better to be out of debt than in it.

A loan in any shape or form is debt.

Step 3 – Calculate how much to save

Once you know how much you need to save, you can start working backwards. Look at what savings you already have. Don’t use your entire lot of current savings, but perhaps thinking of allocating 15%-20% to your car purchase goal. The rest should be left untouched for emergencies or for long term goals.

Now work out the left-over amount you need. Let’s say that the car you want to buy costs ₹5 lakh (on-road), of which you already have ₹50,000 that you can use from your current savings. Usually, you can get up to 90% funding for the on-road price of a car. That means at the upper limit you will be able to fund through a loan is ₹4.5 lakhs. Now you may think that since you already have ₹50,000, you can immediately buy this car.

While that is fine if you really need the car immediately if the purchase is not urgent you do have the opportunity to plan a little and perhaps save up to buy the next level model or even increase your car goal value. Alternatively, you can save more to reduce costs by increasing the down payment.

Step 4 – Calculate what time horizon you have for this

A lot depends on how much time you give yourself to save up for the goal. One scenario is that you have no savings and need this minimum time period to save. If this is the case, you don’t have a choice of the time horizon. Let’s say for the ₹5 lakh car you have selected; you have zero savings which you can allocate at the moment.

Then your time horizon will depend on the minimum amount you can save each month. If you are able to save ₹3000 a month you will need at least 17 months before you can afford to buy the car on a 90% loan.

If you can save ₹5000 a month you will need 10 months and 5 months if you can save ₹10,000 a month.

Notice that we are not taking into account the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More gains. Ideally, for such short-term investments of a few months, you will pick a product that safeguards capital value rather than something risky. A low-risk investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More will offer a relatively lower return. If you look towards mutual funds, your options are liquid funds with annual returns of around 4%-4.5%  and short term income funds with annual returns of around 7%.

You will need to invest in the growth option of these funds, which also means that at redemption, there is a capital gains tax liability at the same rate as your income tax rate.

You may also choose bank deposits, but here you will have to be careful in choosing the tenure based on your goal horizon. A one-year fixed deposit is giving roughly 4.5%-5% today and on this, you will pay tax on the interest received at your income tax rate.

Hence, the post-tax gains aren’t going to be very large for you to account for, but you must invest for efficiency beyond your savings bank account return of less than 4% per annum.

Step 5 – Implement

The most important step is to actually implement this. There can be many reasons why you can’t save ₹3000 or ₹5000 a month. However, you have to find a way, if the car purchase is important for you. Cut back on your electricity bill, phone bill or if you don’t pay for these, then your apparel purchases in a month, food delivery bills or even switching to less expensive personal care brands can help you save.

There is always a way to save more, you just have to dig deeper to find it if it isn’t staring at you.

End Note

As you go through this process you will also realise the power of making choices. The choices you make are important.

• Choosing the car model and variant as per affordability. Dissuade yourself from buying a good-looking expensive car with an unaffordable EMI.
• Choosing to make an outright purchase versus going for a loan.
• Choosing the loan tenure as per affordability.
• Choosing how much to save every month.
• Choosing what is more important to you when you save versus spend your money

Saving up to buy a car is not only about the car you want to buy; it is a discovery in self-reliance and self-control. Everything we do with our money is defined by our behaviour; money is as malleable as it gets, and it’s our behaviour that we need to control.

Go ahead and start researching your car purchase goal, don’t hold back but also don’t forget your boundaries.

Write to us if you have started this process and tell us of your success @ l[email protected].