20-4-10
Owning a vehicle can be light on your pocket if you apply this rule before deciding
Gone are the days when acquiring a vehicle was seen as having arrived in life. These days owning a vehicle is about freedom and convenience.
>Also, having a personal mode of transport has become a sine qua non, or essential, post-Covid as many of us are reluctant to use public transport due to hygiene concerns.
The fact that Indians prefer owning a vehicle is evident in the sales numbers. Indian carmakers sold 3,31,513 units in April, up 13% from a year ago.
While owning a vehicle appears to be simple, there are associated costs.
The Real Cost of Owning a Vehicle
The purchase price of the vehicle you're considering and the operating expenses together make up the Total Cost of Ownership.
Before buying a vehicle, it's crucial to consider all the costs involved. The price tag is just the beginning—there are additional expenses like insurance, road tax, maintenance, and fuel to consider.
While vehicles are depreciating assets, select popular brands continue to get a good price in the resale market.
As a buyer, you must consider both the Total Cost of Ownership and its short-term price, commonly known as the purchase price.
Ultimately, a vehicle with a lower Total Cost of Ownership will be more cost-effective in the long run.
A Thumb Rule
The 20-4-10 rule is an easy-to-remember guideline that can help you make sound financial decisions when purchasing a vehicle or any other vehicle.
The rule has three parts.
The first part is the number 20. This means that when buying a vehicle, your down payment should be at least 20% of the on-road value of the vehicle. So, for a vehicle that costs ₹15,00,000, your down payment should be at least ₹300,000.
The second part states that the tenure of your vehicle loan should be at most four years.
Although it might be tempting to opt for a longer term with lower monthly payments, it usually means paying more interest in the long run. A shorter term helps you pay off the loan faster.
The third part is that your monthly transportation costs, including the vehicle loan repayment, should not exceed 10% of your monthly income.
There are several advantages to following the 20-4-10 rule when buying a vehicle.
- It promotes financial discipline by ensuring you don't overcommit to a purchase.
- It helps you avoid the pitfalls of an upside-down loan, which can make it difficult to sell or trade in your vehicle later.
- You can own the vehicle earlier, giving you greater financial flexibility.
Like with all rules, there will be exceptions.
Someone with a compelling reason may prioritise owning a vehicle at the earliest and give the rule a miss.
Buying a vehicle is a big decision for most of us, and this will be one of the things that can help you make this decision easier!
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