Buy vs. Rent a Car in India: Which is a better option?

Buy vs. Rent a Car in India: Which one is a better choice for you?

You just got your first high-paying job, and now you think it’s the time to get the “dream car” you have been aspiring for all these years. It may be an excellent way to deal with your huge paychecks. And why not, cars have always been closely associated with excitement and passion. You have got multiple reasons to justify this decision as a car is symbolic of your success and self-reliance. It provides you with the mobility to travel distances conveniently; making you unstoppable and on top of the world. The achiever’s feeling that you get while driving a car may seem incredible. So, owning a car is a status quotient that gives you an edge over your peers.

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However, buying a car is a far-reaching business altogether. You need to ensure that you don’t succumb to love at first sight. Such a decision involves substantial expenditure and a hasty decision always tend to dent your finances in some ways. It may have serious repercussions over other critical goals of your life as well. The article doesn’t aim to deter you from buying a car. Instead, it intends to drive home the message of rationality that should prevail while making any financial decision.

Also read: 6 Steps for financial planning of young adults

Owning a car comes with its share of pros and cons. Firstly, you need to provide for finances; either your funds or arrange a car loan from a bank. In case you already are indebted by an education loan or a home loan, then an additional liability to pay off by way of car loan EMI could rather aggravate the financial burden. Once you have bought the car, then you need to get ready to attend to other variable costs. It would be in the form of regular maintenance of the vehicle and the annual premium that you would have to pay for car insurance. The commitment to shoulder the fuel bills, considering the ever-escalating fuel prices, may put considerable pressure on your liquidity position.

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To make things a bit lucid, let’s look at the following example.

Suppose you plan to buy your first car; a regular hatchback say Tata Tiago or a similar petrol car. The on-road price of the car comes to the tune of Rs 600000. You decide to take a car loan for 5 years at 10% rate of interest. You would have to pay an EMI of Rs 12749, totalling the amount of liability to Rs. 764940. If, on an average, the car gives a mileage of 15 kmpl within the city limits then considering the price of 1-litre petrol to be Rs 80, your cost of fuel per km would be Rs 5.3. Accordingly, over a period of 5 years if you travel 1500 km in a month, then the total cost of fuel would amount to Rs 477000. The car would have to be taken to servicing and maintenance on a regular basis. Moreover, as you would be insuring your prized possession, so you would have to shoulder premium payment obligation as well. The 5-year cost of maintenance & insurance can be, thus, assumed to be somewhere around Rs 125000.

You may love your car very much, but you cannot ignore the fact that it would depreciate year after year. Assuming a rate of 15% on written down value, the value of your car at the end of 5 years would be reduced to around Rs 313214. Hence, the total cost of owning a car can be arrived at by using the formula given below:

Total Cost of owning a car= Total loan amount repaid + Total cost of fuel+ Cost of maintenance&insurance-Salvage Value

After applying the above formula, the Total Cost of owning a car would equal to Rs 10,53,726. Now, that’s a pretty massive expenditure you would have to undertake to fulfil your emotional desires of pride and pleasure of owning a car.

If you are looking for a more feasible and value-for-money alternative that addresses your passion for driving, then you can leverage the technology to simplify your daily travel. You may hire a Self-driven car by using apps like Zoomcar, Volercars, Ecorentacar and the like.

Consider the following for better clarity on the cost of self-driven cars.

Suppose you travel a total of 50 km on a daily basis. If the Cost of travelling per km is Rs 12, then Cost of travelling per day would come out to Rs 600 and in the same manner, Cost of travelling for 5 years would sum up to the tune of Rs 10,95,000. In case the figures are giving you jitter then just pause for a while; there’s more to come. You might remember that the EMI which you had to pay in case you chose to buy a car would be at your disposal in case of renting a self-driven car. Investing the sum of Rs 12749 via SIP route in mutual funds, assuming a moderate rate of 12%, would yield returns of Rs 10,00,000 at the end of 5 years. Therefore, the net cost of the self-driven rented car would be Rs 95,000.

In case driving doesn’t suit your palate, you may opt for a car on rent with a driver. The latest car rental apps like Ola, Uber, Meru, and the like have made hailing a cab from your smartphone all the easier than before.
The table given below shows a break-up of the cost of renting a car. If per km cost of a rented car is Rs 13 and your monthly distance travelled is 1500km, then the cost of renting a car for a month would be Rs 19,500. Accordingly, the Cost of renting a car for 5 years comes out to be Rs 11,70,000. In this scenario also, you get an opportunity to invest the sum of Rs 12749 in mutual funds via SIP and could earn returns around Rs 1000000. Thus, the net Cost of Renting a Car would be Rs 1,70,000.

You may even go for options like Olashare to enjoy a shared ride which would be far cheaper than the above option.
The estimates shown in tables have assumed that you travel a fixed distance every day. If you travel more, then your travelling costs may escalate both in the case of owning a car as well as renting a car. Still, whether you opt to own a car or go for a rented one depends on other circumstances as well.

Renting a car makes sense when you have a predefined travelling schedule, you can simply hop on your car and reach the place on time. It provides you freedom from the worries of maintenance and depreciation. However, there’s always an uncertainty concerning the availability of the vehicle when you need it the most.

Otherwise owning a car makes more sense on account of convenience. When you have a diverse business territory to traverse and without a predefined travelling schedule, it may be inconvenient to hire a cab as per your suitable timings. Moreover, as these cabs travel on a fixed route, you may not find one if you have to reach a remote location.

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Also read: 7 investing mistakes to be avoided by Young Investors

Final Words

Although cars have always been closely associated with excitement and passion, there’s a cost attached to it. Owning a car may seem emotionally gratifying which is not possible in case of hiring a car. Conversely, hiring a car would make more sense economically but would not cater to your passion for ownership. Now it’s up to you to decide how do you base your financial decisions; emotionally or rationally.

Get your financial plan done by a Registered Investment Advisor. Its FREE, but spots are limited… Register now.