'If your auto loan EMI eats your SIP, then you’re not buying a car': Expert explains why

In India's rapidly urbanising middle class, owning a car is often seen as a marker of success. However, financial experts are increasingly cautioning young earners about the potential pitfalls of such purchases. A typical scenario involves a young professional, earning Rs 60,000 a month, deciding to buy a car priced at Rs 12 lakh. This decision, often financed through a seven-year loan, results in equated monthly instalments (EMIs) of about Rs 18,000, consuming nearly 30% of monthly income.

The financial outcome of this choice can be significant. As a consequence, long-term wealth-building opportunities, such as Systematic Investment Plans (SIPs), are often neglected in favour of sustaining car payments. For instance, a monthly SIP of Rs 5,000, foregone due to budget constraints, could have grown to Rs 6–7 lakh over seven years with a conservative annual return of 12%.

Chartered Accountant Nitin Kaushik highlights the broader implications of such financial priorities. "People often justify the car by calling it a necessity, which it may be," he notes. However, he warns, "But if your EMI eats up your investing capacity, you're not buying convenience — you're selling your future." This sentiment underscores the long-term sacrifices made in pursuit of short-term material comforts.

The financial depreciation of vehicles further accentuates this dilemma. A car originally valued at Rs 12 lakh might depreciate to Rs 3–4 lakh by the time the loan is cleared. In contrast, the same money, if invested wisely, could yield significant returns, growing beyond Rs 50–60 lakh over 20 years. "Your EMI should ideally not exceed 15–20% of your monthly income," advises Kaushik.

Car purchase vs SIP investment

The emphasis on appearances over financial health is a concern. "If it does, and if you're forced to skip basic wealth-building moves like SIPs or emergency savings, you’re compromising long-term financial stability for short-term comfort," Kaushik warns. This insight pushes young professionals to reconsider their financial strategies and prioritise stability over consumption.

As the allure of instant gratification continues to tempt young earners, the true measure of success may well be financial freedom — a goal that requires a more judicious balance between consumption and investment. In this context, the decision to purchase a car should be carefully weighed against the opportunity costs and long-term financial goals.

Moreover, understanding the real cost of ownership, including maintenance and insurance, is crucial. These additional expenses can further strain finances, making it imperative to evaluate whether the purchase aligns with one's financial objectives. Additionally, considering alternatives like public transport or carpooling could offer practical savings, allowing for more substantial investment in future security.

Exploring options like second-hand vehicles or leasing could also mitigate financial strain, providing flexibility without the long-term commitment of a new car purchase. Furthermore, young professionals can benefit from financial education that emphasises the importance of saving and investing early, thus building a more secure financial future.