Should You Buy An Old Or A New Car?

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Are you considering buying a car and contemplating buying a ‘new car’ or an ‘old one’?

The purchase of a car cannot be considered an investment as it depreciates over time. Its value starts declining from the next day you purchase a vehicle. Hence, you have to evaluate the cost-effectiveness while you make this decision. Buying a car is usually economical if you travel medium to long-distance daily as against shorter distance. Similarly, if you are purchasing a used car, you have to consider the cost of maintenance that will come with it, which is much higher compared to the new car.

In this topic, we will discuss the pros and cons of buying a brand new and second-hand car.

Pros of buying a new car over an old car

  • The maintenance cost of the new car is much less compared to the old one.
  • Technology is advanced in new cars, which enables to save on fuel cost and battery life. New cars are equipped with the latest safety measures, which is crucial to consider before buying. 
  • The interest rate for buying a used car is higher than the purchase of a new car.
  • Maintenance cost is relatively low in the initial years of the new car.

Cons of Buying a new car over an old car

  • An additional cost of registration, road taxes etc., to be paid at the time of purchase of a new car, which is not applicable when purchasing an old car.
  • The depreciation rate on new cars is higher in the first three years.

Cost aspect: Buying a new car Vs old car

We saw the advantages and disadvantages of both the options. Now let us consider the cost aspect of choosing any of these options.

Let’s take an example of Udit to understand it better. A 30-year-old Udit wants to buy a car. He has saved Rs 2 lakh for the down payment, and the remaining amount will be financed as a car loan. He is contemplating which option would be better off- Purchasing an old car or a new one.

We will consider the cost of purchase as well as maintenance and usage of both these options.

NEW CAR PURCHASE

The cost of the new car would be Rs 7 lakh. Udit will make a downpayment of Rs 2 lakh and take a loan for the remaining Rs 5 lakh for 5 years at a rate of 9% per annum. EMI for Rs 5 lakhs per month would be around Rs 10,379 per month. Registration and other taxes will amount to Rs 50,000, which will be a one-time cost.

Cost of buying a new carAmount
Down-payment (i)Rs 2 lakh
Loan AmountRs 5 lakh
EMIRs 10,379
Amount payable to bank in 5 years (ii)Rs 6.20 lakh
Registration and taxes (iii)Rs 0.50 lakh
Total cost of buying a new car (i+ii+iii=A)Rs 8.70 lakh

Cost of running a new car:

Hence, the total cost of the car for a tenure of 5 years would come down as below:
Cost of fuel: Fuel cost would depend on the number of kilometres you travel. Let’s assume that your car gives a mileage of 12 km/litre. You commute for an average of about 700 km per month. Hence, your total travel in the next 5 years for work would be about 42,000 km. 

Considering the average fuel cost at Rs 82 per litre, fuel for the new car will be Rs 7/km. Hence, the total fuel cost would be Rs 2.94 lakh in 5 years.

Cost of Insurance and maintenance: Let’s assume the total cost of car insurance will be Rs 80,000 over the next 5 years. The monthly maintenance cost would be about Rs 15,000 on average for a new car, i.e. Rs 75,000 for 5 years. 

Cost of miscellaneous expenses estimated to be Rs. 15,000 in 5 years. 

The car’s resale value is in good condition and assumed to be Rs 3 lakh. 

Hence, the total cost of the car for a tenure of 5 years would come down as below:

Cost of running new carAmount
Car Maintenance costRs 0.75 lakh
Add-Car Insurance costRs 0.80 lakh
Add-Petrol/diesel costRs 2.94 lakh
Add-Misc. expensesRs 0.15 lakh
Less-Car Resale priceRs 3.00 lakh
Cost of running a new carRs 1.5 lakh
Total cost of a car in 5 years (A) + (B)Rs 10.30 lakh

OLD CAR PURCHASE

If we consider purchasing a second-hand car of a similar model, it could cost Rs 4 lakh (approx 3 years old). Since Udit has already saved for the down payment, he will take a loan only for Rs 3 lakh. Used car loan interest is usually on the higher side, around 14-15%; we assume it to be 14.5% per annum. EMI for the used car would be around Rs 7,058 per month.

Cost of buying an old carAmount
Down-payment (i)Rs 1 lakh
Loan AmountRs 3 lakh
EMIRs 7,058
Amount payable to the bank in 5 years (ii)Rs 4.24 lakh
Registration and taxesNil
Total cost of buying an Old car (i+ii= A)Rs 5.24 lakh

Cost of running an old car:

Maintenance cost: The cost of maintaining an old car would be higher than the new one. So let’s consider that the cost of maintaining an old car in the first year is Rs 18,000, whereas it keeps on increasing by 10% every year, which amounts to Rs 1.09 lakh for 5 years.

Cost of fuel: Even if the old car’s condition is good, the average mileage for a 3-year-old car would be lower than the new car. Let’s assume that the average mileage for a second-hand car is around 7 km/litre. Considering the same travel distance, 700 km per month i,e 42000 km in 5 years. With the average fuel cost at Rs 82 per litre, the fuel per km cost will be approximately 11/km. Hence the total fuel cost would be Rs 4.62 lakh in 5 years.

Cost of miscellaneous expenses estimated to be the same as in a new car, i.e. Rs 15,000 in 5 years. 
The used car’s resale value will be less than the old car, which is estimated to be Rs 1.5 lakh.
The car insurance premium of the old car is usually higher compared to the new car. The same is assumed to be Rs 1.10 lakh for 5 years.

Hence, the total cost of the car for a tenure of 5 years would come down as below:

Cost of Car Purchase (5 years)Amount for 5 years
Car Maintenance costRs 1.09 lakh
Add : Car Insurance costRs 1.10 lakh
Add: Petrol/diesel costRs 4.31 lakh
Add: Misc. expensesRs 0.15 lakh
Less: Car Resale priceRs 1.50 lakh
Total cost of running old car (B)Rs 5.15 lakh
Total expenditure of Old car in 5 years (A) + (B)Rs 10.39 lakh

Comparison

As tabulated above, the expenditure incurred towards ‘New car’ and ‘Old car’ is nearly the same. The cost of purchasing an old car is more expensive than purchasing a new car as per the above example. The cost of acquiring a new car is Rs 10.30 lakh, whereas acquiring an old car is Rs 10.39 lakh for 5 years.

One should evaluate the cost-effectiveness of both the options to arrive at a decision. In case you have an offer to buy an old car at a very reasonable price, you can go ahead with the old car. 

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