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Deciding on a car budget? Here are some tips you should consider before making any decision. Be wise today for a stress-free tomorrow.
A car is more than just a machine on four wheels. It is a status symbol. But it should not stop you from considering the important factors you need to consider before buying your first car.
Purchasing a vehicle is the second biggest investment in a millennial's life after home.
Hence, it would be best to consider all factors before buying.
This guide will help you make the right decision.
How long should you wait to get a car after getting a job?
Gen Zs or millennials, buying a car right after getting their first job is everyone's dream.
But, it may not be the wisest decision. Here's why.
1. Employment history
If you plan to buy a car using an auto loan fresh out of college and in your first job, wait at least six months or, ideally, one year.
Most loan providers require a substantial employment history before dispersing any loan.
2. Build credit score
This is a crucial eligibility criterion for getting any loan.
While you wait to build up the necessary employment history, use this time to construct a good credit score.
A year or two is sufficient time to do so. Ensure you pay your bills on time and do not leave any outstanding balance.
3. Consider your existing debt
Before getting into the loan cycle to buy a car, consider a few things.
- Why do you need the vehicle? Is it a necessity or due to peer pressure?
- Do you have any existing debt? Personal loan or education loan?
- How much does your living cost?
- How much money are you investing every month?
- How much money do you have left after paying for everything?
How much loan should you take?
Once you have answers to all of the above questions and know you can afford an additional debt burden, you can buy a car on loan.
Your car should not cost more than 50% of your annual salary.
The thumb rule to calculate the ideal loan amount is to employ the 20/4/10 formula. According to this, you should pay 20% of the car amount as a down payment, and the remaining 80% can be paid by loan.
You should try and pay this amount within 4 years of acquiring the loan, and the EMI should not exceed 10% of your monthly take-home salary.
Let's understand this with a simple example. Let's say your annual CTC is 10 LPA. So, your car amount (on-road price) should not exceed 5 Lakh. So you should pay 1 Lakh as a down payment and encash the remaining 4 Lakh with a loan. Hence, your monthly EMI would be ₹9,578 at an average of 7% interest for the 4-year loan.
What are the things you should consider before purchasing a car?
As discussed earlier, car purchasing is not an easy decision to make.
Apart from the loan amount, the affordability of monthly EMIs, credit score, and employment requirement, there are other factors you should consider before buying a car after getting your first job.
1. On-road price
When you decide to buy a car, the price of the vehicle is not the only thing you have to pay.
You also need to factor in the license cost, registration, road tax, insurance, and other necessary accessories.
Car shopping is worth it only if you can afford all these additional expenses.
2. Car type
Buying a car is as much an aspirational expense as it is a necessary one.
Your chosen car should be based on its usage, not just as a status symbol. For instance, a hatchback is suitable if you are single or have a family of 3-4.
If you have teens or pets, a sedan should be ideal. And if you go on trips frequently with your friends or family, an XUV should be a great choice.
3. Car ownership cost
On-road price is not the only thing to consider while deciding on a car budget.
You should consider fuel, servicing/spare parts, and car insurance premiums.
It may seem insignificant, but the constantly rising fuel price and inflation can lead you to miscalculate the overall ownership cost, derailing your monthly budget.
We hope you now have a fair idea of what are the things you should contemplate before buying a car. No matter when you decide to buy your vehicle, be it right after getting your first job or a few years later, make the right decision by factoring in every aspect.
Be prudent in determining your new automobile budget, and never extend it unnecessarily, as this can throw your financial plans off track in the future.