BackIs festive season the right time to buy a new car?
Depending on the buyer's financial perspective, each discount scheme must be evaluated
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In India, festivals are not only about having a good time, but are also auspicious periods during which new ventures are started or expensive purchases made. Property and cars often figure at the top of a buyer’s wishlist. Economic prosperity notwithstanding, a car is still a big-ticket item for a majority of Indians. It’s no wonder then that the arrival of festive seasons is marked by offers and discounts. Depending on the car manufacturer and the model, festive season discounts can offer savings for the buyer with discounts on prices and loan interest rates, or with add-ons such as car insurance or accessories.
However, is car purchase during the festive discount season really worth it?
Depending on the buyer’s financial perspective, each discount scheme must be evaluated considering all other options before taking a final decision. Unlike other discount schemes, buying a car with a festive discount offer should not be taken at face value. Let us understand this with an example.
Mohan and his neighbour Ravi both wanted to buy a car. Both had a limited budget and wanted a car as a utility. Let’s say, they shortlisted the same model, and made a downpayment of ₹ 1 lakh. Mohan bought the car in October and took an auto loan of ₹ 5 lakh for a period of seven years. He got a 0.5% discounted interest rate on the car loan, i.e. 11% as the festive offer. He paid ₹ 8,560 as the equated monthly instalment (EMI). At the end of the tenor, he had paid ₹ 7,19,040 altogether, which also means that he paid ₹ 2,19,040 as interest for the loan.
After seven years, Mohan sold the car at ₹ 2 lakh. So, in effect, it negated the savings he had made by taking up the discounted loan offer. Had he waited till January, he could have bought a new model, which almost guarantees an additional ₹ 50,000 in the selling price at the time of resale. Though a festive offer of 0.5% discount in the loan interest rate sounded good at the time of purchase, the savings he gained as EMI is only ₹ 11,340 (considering that the total financial output for the same tenor at 11.5% is ₹ 7,30,380). Effectively, the amount saved is actually nil.
In fact, had Mohan waited even two months, he could have saved more, as Ravi did.
Ravi bought the same car as Mohan, but in December 2014, for a cash discount of ₹ 50,000 on the existing model since an upgrade was due in 2015. Even though Ravi took a car loan for ₹ 5 lakh for a seven-year period at 11.5%, he enjoyed the benefit of the discount immediately. The total amount he repaid for the loan was ₹ 7,30,380. The interest shelled out was ₹ 2,30,380.
Compared to Mohan, Ravi saved around ₹ 38,660 after factoring in the loss of not opting for the discount in interest rate ( ₹ 50,000 less ₹ 11,340). He sold the car after seven years at the same price as Mohan.
In the above illustration, the one who got the maximum benefit out of the seasonal offer is Ravi.
In the above example, had both Mohan and Ravi been in a position to pay higher EMIs, say, by ₹ 2,000, they could have actually cut their losses significantly. Doing so would have made a significant difference to the total interest outgo—to the tune of ₹ 50,000. Considering the fact that a car is a depreciating asset, it makes sense to opt for the shortest tenor possible.
A three-year tenor is ideal for a car loan. You can even pre-close the loan early, if you are interested in changing cars in the span of 3-4 years.
Also, if Ravi or Mohan were in a comfortable financial situation, they could have waited till January to get a new car model, which would be registered in 2015 and not 2014, which would play a role at the time of resale.
A slightly more expensive new model would not have made much difference to their purchase. They would have the option of changing their car in a couple of years, and pre-closing the loan. This would mean saving on the interest payment, which is much more than the cash discounts. More importantly, festive discount schemes are not always available on the top-end models and are usually only for older models that are being phased out to make way for new upgrades.
Remember to base your purchase decisions on your exact needs and not on discounts available as this may often, ironically, lead to actually stretching the current budget.
On the other hand, if you plan to use your car for more than 4-5 years, or are looking to practice your driving skills before investing in a brand new car, you should try and utilize the festive offers. The idea is to understand your situation well and construct your purchase decisions around your actual needs.
When buying a car during a festive season, remember to account for factors such as the loan amount needed, total loan cost, resale plans, comfortable EMI payments and others, before taking a decision.
Adhil Shetty is chief executive officer, BankBazaar.com
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