Before Buying a Car: 4 Questions That Could Save You Rs 80 Lakh

By
Hemant Beniwal
-
56

Last Updated on April 8, 2026 by teamtfl

“The car you drive says nothing about where you are going. It says everything about where your money is going.” – Anonymous

A friend sent me an SMS a few years ago: “Acquired my dream possession – a second-hand Mercedes C200, 3 years old, for Rs 18 lakh.”

He was earning Rs 15-16 lakh a year. He had just spent more than his annual income on a car. I nearly called him. Then I saw the words “dream possession” in the message and understood that calling him would only make me the villain in his story.

He was not being irrational. He was being human. That is exactly the problem.

⚡ Quick Answer

A car is a depreciating liability – not an asset. The thumb rule: total car value should not exceed 50% of your annual income. Loan down payment minimum 20%, tenure maximum 4 years, EMI maximum 10% of monthly income (the 20/4/10 rule). Replacing every 3-5 years is one of the most common ways middle-class wealth quietly evaporates.

Is a Car an Asset or a Liability?

Walk into a car dealer. Buy a car. Drive it out. Then immediately ask the dealer to cancel the purchase and refund you. He will not refund 100%. He will offer 15-20% less, saying he needs to arrange a buyer. Call a friend and offer your one-day-old car at the purchase price. Nobody will take it.

An asset appreciates or generates income. A car does neither. From the moment it leaves the showroom, it depreciates. The moment you drive out, you are Rs 1.5-2 lakh poorer on a Rs 10 lakh car. This is not the car’s fault. It is the definition of a consumption asset – something with value that gets consumed through use.

The correct mental model: a car is an essential liability for most families. The question is not whether to own one – it is how to own it without letting it quietly sabotage your financial life.

🚫 The Upgrade Loop

Buy on loan, pay interest for 5 years, sell at depreciated value, use proceeds as down payment on a bigger car, take another loan. Repeat every 5 years through a working career. The total lifetime cost – purchase price + interest + depreciation lost – is staggering. Most people never calculate it.

How Much Should You Spend on a Car?

The 20/4/10 rule – borrowed from Western personal finance but completely applicable in India:

  • ▶
    20% minimum down payment. Less than this and you are financing depreciation on borrowed money – the most expensive way to own anything.
  • ▶
    4 years maximum loan tenure. Beyond 4 years, you are paying interest on a car that is losing 15-20% of its remaining value every year. The math never works in your favour.
  • ▶
    10% of monthly income as maximum EMI. All vehicle loans combined – car, two-wheeler – should not cross 10% of take-home pay. Beyond this you are restricting your capacity to save for goals that actually appreciate.

The total car value should not exceed 50% of your annual income. If you earn Rs 15 lakh a year, a Rs 8 lakh car is the upper limit. Not Rs 18 lakh. Not on a loan, not in cash.

The Lifetime Cost Nobody Calculates

This is where most people get a rude surprise when they finally sit down with the numbers.

Consider two scenarios for someone retiring in 2036:

Scenario Replace every 7 years, Rs 7L car Replace every 5 years, upgrading
Present value (net cost) Rs 14 lakh Rs 24 lakh
Future value at 7% inflation Rs 50 lakh Rs 82 lakh
Opportunity cost (if invested at 10%) Significant Larger than your retirement shortfall

The Rs 32 lakh difference between the two scenarios – invested in equity at 10% over 15 years – grows to over Rs 1.3 crore. That is not a small number. That is the difference between retiring at 55 comfortably and working until 62.

THE CAR DECISION REFRAMED AS A RETIREMENT DECISION

Every Rs 5 lakh extra you spend on a car today = Rs 32 lakh less in your retirement corpus at 10% return over 15 years.

Upgrading your car from Rs 12L to Rs 20L = giving up approximately 2 years of retirement income.

Nobody frames the car decision this way. They should.

When Should You Replace Your Car?

The compulsory 3-5 year replacement cycle is a habit, not a necessity. Here is a rational framework:

Replace when the cumulative cost of repairs in the next 2 years exceeds 50% of the car’s current market value. Replace when safety genuinely requires it – not because the model year makes you feel dated. Replace when your family situation has changed significantly (new child, ageing parent who needs easy access) and the current car genuinely cannot accommodate the need.

Do not replace because your neighbour did. Do not replace because the company is offering a “special upgrade price.” Do not replace because your current car “feels old.” It is not old. Your perception of it has changed. Those are different problems and neither of them requires a Rs 15 lakh purchase.

“Cars will always have aspirational value. But the car you drive does not determine the life you live in retirement. The money you did not spend on it does.”

– Hemant Beniwal, CFP, CTEP | Founder, RetireWise

Read next: What is Financial Planning? The 6-Step Process That Actually Works

Every major purchase decision is also a retirement decision.

At RetireWise, we help senior executives see the full picture – how today’s choices compound into tomorrow’s retirement. SEBI Registered. Fee-only.

See the RetireWise Service

Boys will always fancy cars. That will never change. But the way you handle this decision – the timing, the financing, the replacement cycle – makes a compounding difference to your financial life that most people never see until it is too late to reverse it.

Buy the car you need. Drive it until it stops making sense to keep it. Invest the rest.

💬 Your Turn

How did you decide on your last car purchase? Did you follow the 20/4/10 rule – or was it more emotional than financial? Tell me in the comments.

56 COMMENTS

  1. Very Good article, I am owning a car for close to 10 years. Still it is in very good condition. When a thought came to me to change my car, i read this article. I am thinking NOT to change my 10 year old car , If at all i change my car, I will go for Automatic model since the technology is available now a days at affordable prices unlike 5 years back.

  2. A great eye opener! First I’ll buy a truck, earn some money, then I’ll buy a SUV from the profit. I will continue using my small car till then.

  4. Whether to buy a car or not depends on where you live and where you have to go daily. If you live in a place where the public transportation system is good and work in a place which is well connected then you can manage without a car. When I worked in Mumbai I managed without a car for ten years.
    I now have a car and a scooter. I use scooter for short distances and a public transport for long distances. Car is only used for destinations not covered by public transport.
    For buying grocery I use a store which offers home delivery facility so that I don’t have to use car.
    I am not in favour of taking a loan for buying a car.
    My car is ten years old and I have no plans to replace it in near future.

  5. I think with the increase in per capita income, people are buying cars. It is not the question of necessity but of a symble status. Public transport system is not reliable.This may be the compelling reason to purchase a car. One should avoid as long as he can. Liberal loan schemes to buy cars is an important aspect. When to change a car, answer is when one gets richer. In India, still there is need that socially unfortunate be looked after by providing a relible,accessible,competable public transport infrastructure.

  7. Hi Hemant,

    Very informative and knowledgeable. I found your article very impressive and practical thatswhy i joined your site.Please spare some time with me as i want to discuss about my financial plans.I know you are very busy but your valuable advise will encourage me to take right decisions.

    Satish Vyas

  8. Hi Hemant,

    You have brought up this article at the right time. I was planning to buy a new SUV for family as my current car is quite old (15 year old sedan bought 2nd hand). Although I’m buying keeping kids safety and fuel economy in mind, I might have to re-think whether I buy a brand new or a used one. Used SUV will definitely save me a substantial amount and prevent rapid depreciation.
    Article totally makes sense.

    Cheers
    Lloyd

  9. Hello Hemant,
    This is really an eye opener article for youngster. I will just share my experience here for other reader also, I leave in Canada and weather are extreme cold for almost 6 months and you have to own a car for your daily routine, but still I am trying to manage not to buy any car and use Local Transportation system just to save Insurance amount (Insurance part is very costly in western countries). For a couple of week it is hard to adjust with local transportation but after sometimes you start enjoying travel with different people, culture as well as you will come to know geographic area of town.

    • Hi Pravin,
      Not sure how it works in cold places… Do you want to say its almost impossible to live without a car?

      • Hi Hemant
        My brother and sister live in the US. I have visited them many times. I have found that it is not possible for them to manage without cars because there is hardly any public transport system where they live. Even for purchasing groceries they have to travel long distances as there are hardly any stores within walking distances of where they live. A person who can not drive a car can not survive there.

          • Hi Hemant
            One of my relatives returned from the US recently after working for about one year there. He shared with me that the main reason of his return was that he hated driving and that he could not survive there without driving.

  10. I purchased my first car two years ago with money I had saved (not all the savings), took a soft interest free loan from my company and the remaining financed from banker. The reason I bought car was because I never learnt riding two-wheeler and was very afraid of cab drivers/rash drivers. While I could have paid the remaining amount instead of going for loan, I reserved that for emergencies. This was brand new not a second hand as I was new to four wheeler with very little guidance to help inspect/buy a second hand.

    Cash Down – 60%
    Interest free soft loan – 20%
    Financed – 20%

    I think I made an informed decision not succumbing to any social or peer pressure. Most importantly my wife’s support was critical on making this conscious decision. We tell ourselves,
    ‘just because we have money which we can spend, does not mean we have to spend it’. Must say, had to do quite some research on closing in on a make and model considering we have more than dozen options in small cars and all competitively priced.

    I intend to keep my car for at least another 7-8 years (maintenance and disciplined driving is key).

    • Thanks Badri for sharing this .. Hope this will be helpful to other readers.
      ‘just because we have money which we can spend, does not mean we have to spend it’ this was awesome.

  13. Dear Hemant,

    An excellent article. I agree with you regarding the suggestion that a person should not replace his or her vehicle every 3 – 5 yrs. I made a comparison on whether to buy a new car after 5 yrs., or to continue with my current car and my assessment was that it was cheaper to maintain my current car rather than to buy a new one.

    Best Regards
    Ismail V.

  14. it is very common nowadays to take personal loan, car loan , home loan.
    salaries are high and it is very easy to afford all loans and banks also are willing to give more.

    you cannot put price on going long drive with your lover/spouse/children.

    “those who have teeth can eat pakoda..others should keep quiet”

    • Hi Vraghavan,
      It looks you are promoting Visa card .. It’s priceless .. But we all know we have to pay price.. May be pakoras are too hot for most of the people. 🙂
      I am bit worried because you said personal loans.. It’s most expensive way to finance anything and biggest reason for getting into debt trap.

  15. Yet another interesting post. I fully agree that having a car is a status symbol. Fortunately the car is provided by the employers in many cases either partly or fully since the EMIs and the maintenance are covered through some sort of an allowance, though this would attract the applicable Tax. I feel that the buying of car with own funds or through loan doesn’t seem to make economic sense, unless the same is required for extensive use.

    • Hi Rajan,
      That’s true that some employers provide benefits on buying cars but still people should do their calculations.

  18. Great article Hemant.
    I too agree car being a liability.
    I was planning to replace my car not to upgrade but to go for auto transmission and a smaller car so my wife can also drive easily! This decision only has caused my relatives to think why I am doing this!
    And now I have decided to go for a second hand small car. Lets see how it goes.

  19. Hi Hemant Sir,
    Great Article!I fully agree on what you said.I think that the middle class people should understand the other prime requirements like the future arrangment for the family instead of thinking of the Pear or other so called pressures.I think everybody should think about the family first.Thanks a lot!People should understand the difference between an asset & the liabilities!
    Thanks Again for the nice article.
    Sona.

    • Hi Sona,
      Buying car definitely have significant impact on other goals .. Easy availability of loans make people feel that they can afford anything but that’s not true.

  21. Interesting read Hemant! I think the best time to replace a car is when the depreciated value is good enough for you to get a good resale price. This is typically 3-4 years from the purchase of the first car, assuming by the 3rd year the depreciated value is approx 50% of the original value. Therefore, by selling in the third year, you can get a good value for your old car and use more as down payment for the new car.
    Of course the down payment depends on factors, like other loans the client already has, capacity of down payment, EMIs servicing, but generally since the loan rates for automobiles are higher than Home EMIs, it is better to put a large down payment for car loan. I would say more like 50%, with a 3 year tenure. Interest rate would be better here and the EMIs more affordable. This is just my point of view.. But excellent write up. Something we end up negotiating with our clients always.. mainly the men who want fast cars:)

    • Hi Dilshad,
      Not sure if I will agree with selling cars after 3 years but fully agree with your last point – men will be men 🙂

  22. Another similar aspect is people buying SUVs. Many people rush to buy SUVs just because they are macho looking/cool etc. What they don’t understand is how much of an SUV do they really need. The only reason one should buy an SUV is if you offroad too often (bad roads is not offroading) or you need the third row of seats (although there are SUVs with only 2 rows of seats).
    Also, with regard to features, safety etc. SUVs are far inferior to cars of the same price thereby making SUVs a whole lot expensive and not worthy of the price

    • Hi Srik,
      SUV is the fastest growing category… I am not sure about macho looks but people who keep looking for something different are attracted towards it.

  23. Another craze is buying diesel car even though monthly travel is just 50-100 km only which doesn’t make sense at all. Buying diesel means you are paying hefty tax upfront (around a lac) and then trying being happy with small saving when you fill the tank.

    btw, colleagues who have 3x lower package than me are driving honda amaze, brio with hefty emi and when I bought a small 2007 model car, they are all surprised and by their looks, it seems like that I have committed a crime. I don’t give a damn but for majority of people, peer pressure certainly make them take irrational decisions.

    • Hi Jagbir,
      Good to know that you don’t care about per pressure.
      Dave Ramsey author of awesome debt management book “The Total Money Makeover” said
      “We buy things we don’t need with money we don’t have to impress people we don’t like.” I think this perfectly fits in buying a caaaar…. 😉

    • Jagbir,
      I fully agree with you. I have my peers and seniors who are stuck with expensive Mercs that they are unable to sell to get an audi and feel too bad to switch over to a mid segment sedan, all for “image”. And in the process end up being unhappy with their ‘assets’.

  24. I bought my first car 13yrs ago that too an third hand one and used it for 10 years. I replaced it with a new one 3 years back as the production of the model was stopped and I could not get proper spares. I intend to keep the current car for the next 10 years. ( Even after 3 years it looks and drives as new as I maintain it regularly )

  27. “Yes we have to as there be compelling social and aspirational reasons to buy it”
    Most young people base their decisions to buy a car only this way.

    Sometime back I made a “Think before you take a car loan” calculator. It never made sense to buy a new car, never.

    Subra’s friend once said on FB:
    ” My past 3 cars have been second hand ones. The initial erosion of value is paid for by someone else…and I get a product that is still good to go for many years.”

    If one is not frugal by choice when young, life will it enforce it when old.

    • Hi Pattu,
      Great point “If one is not frugal by choice when young, life will it enforce it when old.” makes complete sense.

  28. Nice article, Hemant.
    Though a car makes commuting easier, its not often the case for buying one. We are prone to social and peer presssure. If you subordinate gets a Alto, you must upgrade to SWIFT, that too swiftly.

      • HI,

        It’s very good, informative and real fact has been covered in this topic.
        One month befor i have purchaesd a cars , which has all this asspects.
        i am very happy with my decision.

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