Buying new car vs renting car (Updated)

Buying a car is dream of many Indian middleclass families. Earlier people used to buy cars as they near their middle age. At present many individuals buy cars within few years of getting a job-thanks to higher income levels and easy access to car finance.

It’s too easy and tempting to buy a car- with upto 100% finance, so many options to chose from and peer pressure, people are buying cars in greater numbers than ever.

No doubt a car provides comfort and is deemed essential to ascertain your well being to the society.

But then, the harsh truth is that a car is a depreciating asset or a financial liability. It never increases in value and needs lot of expenditure. Buying a car is the easy part. It really hurts the wallet while paying all new set of expenses- overpriced petrol, parking fee, toll fee, tax, insurance and so on. Of course, at certain stage in life one will be earning enough money not to worry about these petty expenses, but for a new middle class car buyer who bought it on loan, maintaining a car is a complicated affair.

Can one avoid/postpone buying a car? It’s essential to have a vehicle to be able to commute from one point to another. Without a car, other options will be to use public transport or use rented car/taxi. Which will be more sensible?

I’ve been postponing my temptation to buy a car and always managed with rented cars. In this post, a quick comparison as to which is more economical in long run- renting a car on need basis or buying a car on a loan. Both have their merits and demerits…

Case 1: Buying a car on loan
Let us assume one is buying a new car priced at 6.5lakh with Rs 1.5 lakhs down payment and Rs 5 lakhs  as loan amount, of 4 years duration. In this case, monthly EMI will be about 13k

Advantages of owning a car:

• A car at your disposal all the time- easy to go out with friends, family etc
• Certain car related expenses might be reimbursed by the company, if one is eligible
• Convenient and safer than a two wheeler for regular commute
• Better peer recognition
• Cheaper to travel to other states-Commercial vehicles need to pay permit fee while entering other states-this is big pain and will be in several hundred to few thousand rupees
• End of 4 years, you’ll be OWNING your car (it’s another story that the car will be worth less than one third of what you spent on it (Original Cost + interest on loan + insurance, tax, repairs etc-discussed later)

Disadvantages:

• Additional cash outflow in terms of fuel, service, parking and toll fee
• New models hit the road every few months-You might soon get bored with your old car
• You're adding to already congested roads and pollution
• Possible dents, scratches, breakdowns etc to cause more spending over time
• Temptation to use the car when it’s not really needed
• If you're transferred often, getting NOC and using your car in another state is big pain.
• Driving Solo to office in a car that can seat 5 people, is such a waste of road space, fuel
• More time to reach office, compared to two wheeler
• Even when the car is not used, there'll be regular cash outflow in terms of insurance, EMI etc
• Additional cash outflow if you employ a driver
• End of 4 years, you’d have paid Rs 1.5 lakh as interest alone. Total spend on car will be about 9 lakhs (Original cost 6.5 lakh+1.5lakh loan interest+1lakh other expenses (annual insurance, any repairs etc)), but the car will be worth just about 3-4 lakhs in second hand market, about one third of what you spent on it total. If you plan to sell it off and  buy a new car, you’ll effectively lose 6 lakhs on your car

Case 2: Renting a car (on self drive or with driver)
Assuming one would need a car only for weekend long drives and one goes out say 1 or 2 weekends a month, 2-4 day rental would cost about 4-8k (rental only) for a mid size car. The amount would vary depending on number of days, type of car and other factors-let us assume a monthly spend of 10k on rental, keeping in mind inflation, city taxi rentals for local commute etc (Chauffer driven car would be billed differently, on a per km basis)

Read more about Self Drive cars in India

Advantages:

• Huge savings on the money which would have been spent as down payment (1.5 lakhs)
  Interest on this 1.5lakh
• Flexibility to chose a car as per need (small car, sedan, SUV etc)
• Flexibility to do part journey in train/flight and rent a car in destination city
• No worry about maintenance, tax, insurance etc
• If touring with friends, rental cost can be shared. Not possible in an owned car (This doesn’t matter when touring with family)
• No worry about depreciation, car lying unused in garage etc
• End of 4 years, you’ll not be owning any car as in case 1 but you’d have spent about 6 lakhs on rental amount and you’ll have about 2 lakhs in cash (the down payment amount+ interest)

Disadvantage:

• Advance planning is needed and vehicle needs to be booked in advance
• Can’t customize the car as per one’s taste
• Uncertainty: Sometimes booked vehicle may not be available and alternate arrangements may not be made-spoiling your plans
• Additional documentation & inconvenience- need to go to rental agency and collect it/return it every time
• Car rental services aren't that good in tier 2 cities. Not an ideal option in smaller towns
• The car you need may not always be available
• Rental agencies often keep base variants and may not have safety and entertainment features available in top end variants.
• Will have to complete the trip within stipulated time. Delay may result in additional rent. 
• Any damage to vehicle can cost you heavily
• May not be ideal for small trips/short usage
• During peak seasons you may not get a car or rental amount can be much higher

Summarily, in a owned car scenario, you’d have spent 9 lakhs total (down payment, EMIs and maintenance) and will be left with a car whose value is 3 lakhs (Effective spend: 6 lakhs) whereas in a rented car, you’ll spend 6 lakhs in rentals and will have 2 lakhs cash, meaning effective spend: 4 lakhs (Note: Only cost of car is considered. Operating expense-fuel etc will be separate in both cases)

Above is a hypothetical situation. Actual numbers will vary depending on over a dozen factors, such as:

• Assumption here is that car will be used mainly for weekend long drives-may not be the case with everyone, all the time
• Resale value of your 4 yr old car could be higher if it is an in-demand model, well maintained and has run lesser no of kms
• Though new cars available for Rs 2 lakh onwards, car priced at around 6.5 lakh is considered for this illustration, expecting to be robust for long drives
• Even car owners will have to spend on rented cars when they in far away cities
• Factors like Loan amount, duration, rental days, type etc will have an impact on actual spend
• Comfort, convenience and prestige factor associated with owning a car can’t be evaluated in terms of money. For example, if you’re using your luxury car to impress your prospective clients and get more business, or have lot of family time in car while dropping kids to school and spouse to office, then it’s certainly worth it
• After 4 years (end of loan term) the calculations are favorable to car owner as he needn't pay EMI and pays only for car maintenance.

Author’s perspective only. Individual expectations and preferences may vary.


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April 2012 Update: Read another post on this topic- My calculations