3 Common Car Loan Mistakes That People Make
For most Malaysians, buying a car means getting a car loan (also known as hire purchase) to finance the purchase. But is getting a car loan really just a matter of accepting whatever package that gets shoved to your face by the car salesman? In this article, we look at three of the common car loan mistakes that people make when it comes to buying a car using a car loan, and the consequences that they face as a result.
1) Not knowing you have other options
For first-time car buyers, the act of getting a car loan could be a very daunting task. All the legal jargons to contend with aside, many first-time car buyers also have a distinct lack of experience with loans in general (due to their young ages). In the end, most of such car-buyers end up accepting whatever financing packages that come recommended by the car sellers.
If you belong to this demographic, understand that you DO NOT have to accept whatever car loan package that is recommended by the car salesman. Instead, you DO have the option to choose other car loans that perhaps offer lower interests or better terms. And the easiest way to do so is to use an online car loan comparison table to check out the best prevailing deals for the car make and model of your choice.
According to iMoney’s comparison table, as of July 2013, the lowest interest for a 5-year car loan to finance a Honda City in Malaysia is 2.35% p.a., while the highest is 2.78% p.a.. By knowing you have the option to choose and making the right choice, you could be paying 0.43% less interest per year!
2) Evaluating your car purchase based on monthly repayment
Fuelled by desires to own that “dream car”, some car buyers have the tendency to evaluate a car purchase based on the monthly repayment amount rather than the full amount. This a a very dangerous approach as it can cause you to lose sight of what you can or cannot afford; most importantly, it opens up an opportunity for manipulation by car sellers, making figures look more affordable than it really is.
Say your original budget for a car is RM60,000. If you choose NOT to evaluate your purchase by the full amount of the car, a Mitsubishi Triton (at RM103,040) could suddenly seem very affordable if you only see the monthly repayment of RM1,291 for a car loan with a Margin of Financing of 90% over seven years.
Remember: when taking a car loan to purchase a vehicle, it is to your benefit to always have the full principle amount in mind. To understand how risky buying a car that is beyond your means could be, know that between 2005 and 2012, a staggering 25% of bankruptcy cases in Malaysia were related to car loans!
3) Opting for the longest possible loan period
Drawn in by the promise of lower monthly repayment, certain car buyers spread their car loans to the longest possible period of nine years, even though they have the earning capabilities to go for a much shorter period. This approach is actually more common than you think, because subconsciously, everyone wants to pay as little as possible and have more leeway every month.
What many people conveniently forget (or choose to ignore) in this case is that like all bank loans, the longer the period of a car loan, the more interest you pay. By extending the loan period, a car buyer is essentially sacrificing his or her long-term financial interest for the benefit of short-term cash access. Remember: if you can afford to do so, it makes more financial sense to shorten your loan period, NOT extend it!
Using the aforementioned example again, the difference between paying off a Mitsubishi Triton over five years (RM1,735) and over nine years (RM1,044) is RM691 per month. But by opting for the longer term, you’ll end up paying RM20,031 worth of interest – approximately RM8,671 more if you were to choose the shorter term!
Love this article? You may be interested to read about the 4 things you have to consider before you refinance your car loan.
Need help finding the best car loan in town right now? Check out our car loan comparison table!