In Malaysia, most people own at least a car due to the inconvenience and uneven accessibility of our public transport system. When we buy a car, car loan is involved. This car loan is also known as hire purchase.
Key considerations before taking a car loan
1. Loan amount and interest rates
Car loans in Malaysia typically cover up to 90% of the car’s value. Interest rates can vary based on the type of vehicle (new vs. used) and the borrower’s credit profile. Rates for new cars generally range from 2.5% to 4% per annum, while used car loan rates may be higher.
2. Loan tenure
Loan tenures can range from 5 to 9 years. While longer tenures reduce monthly payments, they increase the total interest paid over the life of the loan. On the other hand, shorter tenures result in higher monthly payments but less overall interest.
3. Down payment
A larger down payment reduces the loan amount and the total interest paid. It is recommended to make a down payment of at least 10% to 20% of the car’s price to minimise the loan burden.
4. Monthly instalments
It is crucial to ensure that monthly instalments do not exceed 15% of your monthly income to maintain healthy financial ratios. Using loan calculators can help determine affordable monthly payments based on your budget. It is important to ensure timely payments to avoid penalties and maintain a good credit score.
5. Total cost of ownership
Consider all costs associated with owning a car, including insurance, maintenance, road tax, and fuel. Factoring these into your budget will provide a clearer picture of the car’s affordability.
6. Credit score
A good credit score can help secure lower interest rates and better loan terms. Regularly reviewing and maintaining a good credit history is essential for favorable loan conditions.
7. Debt-to-income ratio
Banks evaluate your debt-to-income ratio to assess your repayment capability. It includes all your debts. A lower ratio improves loan approval chances. It is advisable to keep this ratio below 35%, with no more than 15% allocated to car loans.
8. Prepayment and early settlement
Understand the terms for prepayment or early settlement of the loan. Some lenders charge a penalty for early repayment. Early settlement can save on interest costs, but penalties should be weighed against potential savings.
Practical steps before buying a car
1. Assess financial situation
Review your current financial status, including income, expenses, savings, and existing debts. Calculate how much you can afford to pay monthly without straining your finances.
2. Research and compare
Compare loan offers from different banks and financial institutions to find the best terms. Look for promotions, lower interest rates, and flexible repayment options.
3. Budgeting
Create a budget that incorporates all car-related expenses along with the loan instalments. Ensure that your emergency fund remains intact and that you continue to save for other financial goals.
4. Loan Application
Prepare necessary documents such as proof of income, identification, and credit reports. Submit a loan application only after thorough research and consideration of the terms.
How interest is charged
The interest of most car loans is charged using flat interest rate. The interest is calculated for the whole loan amount at the beginning of the loan tenure. Regardless of how much of the principal you have repaid, the interest charged remains the same for each payment period. This means that the total interest paid over the life of the loan remains constant.
Let’s assume the interest rate of the loan is 3% per annum. If the tenure is five years, the effective interest rate is 5.64%. If the tenure is 10 years, the effective interest rate is 5.46%. I am using the online calculator of loanstreet (click here). Thus, the true interest rate will be higher than the advertised interest rate.
Conclusion
Car is primarily a liability, not an asset, unless you use it to earn money. Once the tyres hit the road, its value decreases. Furthermore, there are other recurring costs associated with car ownership. Nonetheless, since most people cannot make do without a car, this is what we need to accept.
After taking up a car loan, regularly review your loan statements and financial situation. Adjust your budget and financial plans as necessary to accommodate changes in income or expenses.By carefully considering these factors and planning accordingly, you can ensure that a car loan enhances your lifestyle without compromising your financial stability.
In conclusion, assess your financial situation, compare loan offers from different institutions, and read the terms and conditions carefully before committing to a car loan.
How can a financial planner help you?
If you are thinking of taking on a car loan, I could run the numbers for you and see if your cash flow can afford the car. We will also discuss on the loan tenure, total interest involved and also the projected monthly instalments.
If you currently have loans, I will make a list of your current debts and devise a debt management plan for you. You should decide whether the snowball method or avalanche method is to be used (click here to learn more about these two methods). As it is your own finances, you are the ultimate decision maker. Even if the plan is perfect, it would not work if you do not implement it. So, let me know your preferences and select a plan that you would implement wholeheartedly.
If you really cannot follow the plan, do not worry and let me know as soon as possible. I will come up with alternatives. Nonetheless, if you always fail to adhere to the plan, perhaps the plan needs to be overhauled. I will help you with this. I will also refer you to the appropriate party to seek help if your situation warrants it.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.