In India, owning a car is still a luxury rather than a necessity. It is the gateway of entering the adulthood. You are earning, banks are willing to lend you, so you decide to bring home a nice four wheeler for you and your family. But wait, are you buying a new one? Or should you consider a used car instead? Here’s something that will help you chose between new car vs old car using nothing but, mathematics.
Before we jump into the pool of numbers, I want to address the social stigma around buying a used car. There was a time when used cars were looked down upon. It was considered bad for your reputation to own a used car. However, things are changing lately. And with financial literacy spreading its wings, people are opening up to the idea of purchasing a used car.
Any way, life cycle of holding a car has also come down. Earlier, people used to own and maintain a car for 10 years which has now come down to 5-6 years. So, it is quite common these days to find a car which was used for less than 5 years and has a kilometer running of about 50k.
Also, back in the day, apart from societal constraints, regulatory norms also made it very difficult for you to buy a used car. But with Cars24, Car Dekho, OLX etc. coming into the mainstream, you don’t have to worry about any of this. RC transfers, NOCs are all managed by these platforms.
Benefits of Buying an Old Car:
While the personalized decision of picking between new vs old car will come out while we do mathematics, let’s do a quick overview of high level benefits of picking the either side. Starting with the benefits of buying an older car:
Newer cars depreciate faster. In fact, the sharpest decline in the value of the car is observed during it’s first year of purchase.
Therefore, if you purchase a used car, you don’t have to bear the humongous depreciation cost.
Fun Fact: A new car will lose 20% of it’s value as soon as you take it out from the showroom.
Yup, the dreaded EMIs. Although the loans on a used car are more expensive than newer ones, but even then, the difference between EMIs is huge. You may have to shunt out 2x in case of a new car for EMIs.
3. The Inexperienced Driver:
This may not be a direct benefit but if you have just learnt how to drive a car, buying a used car may make much more sense. You will drive with more confidence and lesser fear of scratches and dents.
4. Cheaper Insurance:
The insurance cost for an older car is much lower than a new car. For example, I purchased a car in December 2018 and paid 21k as insurance. Three years later, I got the same renewed at 14k. Therefore, older the car, lesser is the insurance cost.
5. Choice of Variant:
And since a used car is much likely to come within your budget, you can go for a feature rich top variant option rather than compromising in case of an new car. In case of new cars, there is a difference of lacs between the base and top variant. Therefore, you tend to forego some features.
Benefits of Buying an new Car:
While comparing two scenarios, we need to evaluate the both sides with proper diligence and same lens. Therefore, let us find out some key benefits of buying a new car.
1. Better Mileage:
Since you have a brand new revving engine at your disposal, a new car gives more mileage than an older one.
2. Lower Maintenance Cost:
Most of the expenses are either covered in warranty or by zero dep add-on in your insurance policy. Neither of these are applicable on an older car. Therefore, you need to worry less about maintenance of a new car.
3. Freebies and Discounts:
Auto dealerships offer multiple discounts in the year end/festival season on the new cars. Along with that, they have many additional benefits in store to lure you. All of this is hardly found while purchasing a second hand car.
Cost of Ownership: New Car Vs Old Car
Mathematics time. Disclaimer: Numbers ahead.
I have mentioned some key parameters to be considered while evaluating. Basis these parameters, I will derive a cost of owning the vehicle. Let’s get started.
|Parameter||New Car||Old Car||Remarks|
|Cost||10,00,000||5,00,000||Assuming 50% deprication on a new car after 5 years- Cost of old car of same model will be 5L|
|Loan||9,00,000 @ 9%||4,00,000 @14%||Assuming 1,00,000 of down payment for both cases (Loan for used cars is at a higher ROI)|
|EMI||16,223||8036||For a period of 6 years|
|Mileage||18kmpl||14kmpl||Older cars are lesser efficient|
|Total Fuel Cost of Running||2.2L||2.85L||(Assuming Petrol Prices to be @Rs. 80/L on average for 5 years)|
(Assuming running of about 50,000km in 5 years)
|Insurance Cost||10,000 per year||7,500 per year||(Older cars have cheaper insurance)|
|Maintaince Cost||X||1.5X||(No warranty/zero dep applicable on older cars)|
So taking into account the above expenses, a new car costs about Rs. 14,40,278 for a period of 5 years. Whereas, an old car will cost about 9,01,092 for a period of 5 years. (This is excluding maintenance).
Let us take into account the resale value as well. A new car depreciates faster in it’s initial years. However an older car will depreciate slowly.
So, if you sell your new car in 5 years, @50% depreciation you will fetch 5L and on the other hand, assuming depreciation @30% for older car, you will fetch 3.5L.
Deducting the above from the total cost, ownership of a new car costed you Rs. 9,40,000, whereas an older car costed you Rs. 5,51,092. So, over a period of 5 years, you can save 3.5L (approx.) by purchasing an older car. And if you switch 5 cars in your life time, that is a humongous saving of 17.5L.
This will vary person to person. One may decide to purchase and hold a new car for 10 years. In that case, it make much more sense as you would’ve used up the entire life value of the car by then. Also, if your car runs much more than 10,000kms an year, a new car may suit you better. The idea here is to draw a basic skeleton of analysis between new car vs old car.
As mentioned above, around 3 years ago, I purchased a brand new car for me. Today, when I still pay the EMI of that car, I feel really bad about my decision and regret not researching enough before taking a call. However, in order to turn this bad decision into a life-long lesson, I have decided to own this car for a total period of 10 years. That way, at least I would be able to come at par with the cost of the older car. And this is nothing, read here about my bigger financial blunders! Buying a car didn’t even make it to that list.
With that being said, I quickly learnt from my mistake and never let my younger brother purchase a new car. And he couldn’t be happier with his decision. Next month, he is taking a vacation outside India. You know why? Because his EMIs allow him to do so. *Sobs in a corner*
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Until next time..