The (Costly) Economics Of Buying A New Car

28-year-old Raghav Verma from Delhi had a well-paying job. He had completed his home loan and many thought that he would now opt for a new car under financing. But he surprised many by not opting for a new car purchase.

Raghav is not alone. A rising number of millennials have reconfigured their concept of success when compared to the previous generation. They no longer believe in owning cars as a sign of success. Rather, they dwell on experiences from travels, new knowledge, or building startups.

Why a car purchase is not a good investment?

Check out the below reasons why buying a car will not be considered as an astute investment

1 – It’s what millionaires do

Many associate car ownership with social status. However, it will be surprising to note that not many millionaires opt for brand new cars. In the book ‘The Millionaire Next Door’, research has revealed that about 20% of the millionaires do not opt for a new car as it is detrimental to their core objectives of building and preserving wealth.

2 – Opportunity cost

Let’s take the example of a car that costs Rs. 6 lakhs. Its value depreciates by 20% – 25% within the first year of ownership. Thereafter, it loses approximately 10% every year. This means that within 5 years, its value is reduced by more than 60 %. Now, if this amount would’ve been invested in a mutual fund, it would have registered an annual return of 12% on average. It doesn’t take a scientist to deduce which is the better option to invest money in.

3 – EMI cost

If you are financing the car rather than buying it for cash, you end up paying more in the form of interests on the EMIs. Since you borrow more for buying a new car, you end up paying the more total amount of interest in paying the EMIs. This way EMIs add to the cost of ownership with other variables like servicing and fuel costs.

4 – High road density

India’s car density has been rising steadily over the last few years. Mumbai has recorded the highest car density of 501 cars per sq. km. Imagine the car plying on such congested roads. It can result in loss of time with the car stuck in heavy traffic. With the improvement in public transport options available, owning a car is a loss-making proposition.

5 – It is not an investment

Many consider a car purchase as an investment, simply because of its high price tag. However, it defies the basics of investment. An investment product needs to make more money for the investor. Sadly, a car doesn’t do that. On the contrary, it depreciates over time. As it ages, it rapidly loses its value over time, and hence makes no sense as an investment.

6 – High maintenance costs

If you think you are done with just the price of the car, you need to think again. You have to factor in costs like insurance, repairs, servicing it periodically, taxes, and municipal registration. This bumps up the cost tremendously. In urban cities, the parking costs to add to the cost of owning a car.

To sign off

These reasons aptly depict why from an economics and wealth building perspective, buying a new car will turn out to be a costly proposition. Such purchases are without the assurance of returns associated with many wealth-building investments.

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