By Ravi Garg
From a luxury to a necessity, the car has travelled a long way. But considering the income of a middle- class individual, most of us rely upon taking a bank loan for buying a car. There is a rule in finance called 20/4/10 which guides us to know, how much we are able to spend on our dream car and what should be the financing structure. Let us dive into the rule to understand:-
- Determine your budget
First of all, calculate the amount which you can comfortably spend on a car. Consider your current income, mandatory expenses and financial goals.
- Save for Down Payment of your car. Down payment of your car should be at least 20%
After deciding which car to buy, start saving for down payment of your car. As per this finance rule, minimum down payment of your car shall be 20%. Suppose you are planning to buy a car worth Rs 10,00,000. Your payment structure shall be Rs 2,00,000 down payment and Rs 8,00,000 Bank Loan. Start saving Rs 2,00,000 via various modes of investment such as SIP, Mutual Funds, etc. If you do not pay 20% of the cost as down payment then you have to rely upon the bank loan. Higher bank loan will increase the EMI of your car and will eat up most of your monthly income.
- Term of your Loan
Lower the tenure of loan, lower the interest payment. While taking a car loan, negotiate the term of loan with bank. Your car loan should be maximum of 4 years. If you will take car loan for more than 4 years, you will end up paying higher interest costs. Approach various bankers to negotiate interest rates and loan terms.
- Calculate Total Expenses of your Car
Estimate monthly expenses of your car. Monthly expenses include Fuel, Insurance, Repair and Maintenance, Interest payments, etc. Your total monthly expenses should not be more than 10% of your gross monthly income. Suppose you have a CTC of Rs 1 Lakh per month. Your monthly car expenses shall be maximum of Rs 10,000.
If your current income is not satisfying the above rules then this car is not in your budget. For example, suppose you are earning Rs 1 Lakh per month but your monthly car expenses are coming to Rs 20,000 then, either you have to double your current income or select a car which involves monthly expenses of Rs 10,000 only.
TAKE A WISE DECISION
(Ravi Garg is an associate Chartered Accountant, who has completed his CA at just the age of 21 years.)
