Top Financial Considerations When Buying A Car
Buying a car isn’t a walk in the park. Without proper planning and research into what you might encounter, you might just end up in a tight corner. You can’t just look at the price tag when shopping for a car, you also need to consider the running costs and how it’ll impact your financial future.
If you think about it, it’s probably the second most expensive thing you will buy in your lifetime after a home, so it is important to make sure that you work out the best arrangement on financing. Here are the top financial considerations you will need to look out for when buying a car.
What can you afford?
To establish this, you will first need to determine the “true cost” of vehicle ownership. It is not as simple as looking at the price tag and making the down payment. Besides financing, considerations such as road tax, petrol efficiency, insurance, and maintenance will need to be factored in to give you an accurate picture of how much you will be paying.
Many financial experts recommend that you keep your car-related expenses (including petrol and maintenance) to under 15% of your nett salary.
For instance, a recent study by Institute Rakyat found that the median income in Kuala Lumpur was around RM7,620 per month. Going by this average, 15% would come up to roughly RM1,143. So in theory, those who fall under a similar income range should be able to afford to finance a Perodua Myvi 1.3 (2015) Standard G MT quite comfortably.
Sites like Carsome.my will give you a rough breakdown of the monthly instalment based on the best available interest rates. Based on a five-year period, your instalment would come up to a monthly instalment of RM532.07.
However, the costs go well beyond just being able to service the monthly instalments. To own a car, you will be required to make a minimum down payment of at least 10%, as well as on-the-road requirements such as road tax and insurance.
In this case, you will be required to fork out an upfront payment of RM5,369.57 when you purchase a Perodua Myvi 1.3.
So that’s all there is to buying a car, right? If only life were so simple. Operating expenses such as loan interest, taxes and insurance can come up to be about one third to one half of the monthly cost of a new car.
Based on a five-year instalment plan with an estimated driven distance of 25,000km per year, you will be required to fork out about RM4,443.70 a year just for operating expenses of a Perodua Myvi 1.3 (that’s RM370.31 per month on average).
Don’t forget – this is on top of the RM532.07 you will already be paying for instalment every month. If you average the total cost over 12 months, you will be paying roughly RM902.38 every month.
Remember, the operating cost may not present itself as a set amount every month. Sometimes you may not be paying anything more than fuel for the month, while another month may set you back by hundreds to thousands, when your vehicle breaks down.
Making the down payment
When it comes to down payments, you need to know that the more you pay in the beginning, the less you will need to pay in the long run.
Most Malaysian banks currently require a minimum down payment of at least 10% of the total car value, and charge a typical interest rate of 2.5% per annum.
In some cases, banks might offer special purchase deals with 0% down payment. The catch is, this will often result in you paying more in interest because of the higher loan amount.
For example, if the car costs RM39,887.08, and you take on a 0% down payment plan, over a five-year loan period at a typical interest rate of 2.5%, you actually end up paying about 11% more in interest.
|10% Down payment||0% Down payment|
|RM35,898.37 x 2.5% p.a.|
Interest paid in:
12 months: RM897.50
5 years: RM4,487.50
|RM39,887.08 x 2.5% p.a.
Interest paid in:
12 months: RM997.18
5 years: RM4,985.90
In this scenario, pay RM498.40 more with 0% down payment.
Despite the benefits of making a larger down payment, be mindful to not cripple your finances or deplete your savings accounts with too large an upfront amount. Liquidity is extremely important.
What if you can’t afford the down payment?
If you are experiencing troubles with cash flow or cannot afford to pay a big sum upfront, but do not intend to shell out more interest by taking up a 0% down payment plan, balance transfer may be the answer to your problems (if you are disciplined enough in your credit card payments).
What a balance transfer card basically does is, it lets you shift any balance you have accumulated from one card or cards, into a single credit card that offers a very low or 0% interest rate for a specified period. Some balance transfer cards may come with a low upfront fee.
Of course, you can also settle your down payment with your credit card (without utilising balance transfer), but it will entail a 15% interest rate per annum and will cost you more money in the long run!
How does balance transfer work?
For example, let’s assume that you’ve made a 10% down payment at RM3,988.71 using your credit card for a Perodua Myvi 1.3 . From there, you can opt to sign up for a balance transfer card that offers a lower interest rate, and lets you work off your repayment plan at 0% interest.
The best balance transfer cards usually offer 0% interest on new purchases for at least six months. The Maybank 2 Cards, for example, offers balance transfer at 0% interest for 12 months, and at an upfront fee of 3% of the transferred amount.
Here’s how much money you would save if you used balance transfer for your down payment:
|Taking a 0% down payment plan (with a 5-year loan)||Making a down payment with balance transfer and punctual repayment|
|Amount: RM39,887.08 |
Interest rate: 2.5% p.a.
Interest paid in 12 months: RM997.18
Interest paid in 5 years: RM4,985.90
Interest rate: 0%
Upfront fee: 3%
Balance transfer period: 12 months
Monthly payment: RM 342.37
Total interest incurred on BT: RM119.67
Total Interest incurred on car loan: RM4,487.50
With balance transfer, you save: RM378.73
If you do not have any existing debt, why not take advantage of this and save a few bucks? You can clear off the balance over time and not incur any additional financial charges.
The tricky part is to make sure that you pay the required payment punctually every month. Otherwise, the standard interest rate will be applied to your balances.
Getting a loan
How much can you borrow?
Before buying a car, you need to know how much credit you can borrow from the bank. Banks typically assess this based on your debt service ratio (DSR).
The DSR is a popular benchmark used to measure an individual’s ability to produce enough income to cover his/her debt payments.
In general, you will only be able to obtain an auto loan if your monthly debt (including the one you are about to take), does not exceed 60% of your monthly net income.
What if I can’t get a loan?
There is a number of criteria that may determine whether or not you qualify for a loan and your employment status is a foremost factor. Banks usually avoid lending credit to those who are unemployed, as lenders want to see a stable, reliable income stream and employment is a likely indicator that you will be able to service your loans.
Another determining factor is credit rating. As good credit rating is almost always a sure sign of approval, so it would be wise to acquire this in advance. Meanwhile, a bad credit rating could prevent you from obtaining further credit because it’s a sign that you’ve been unable to manage debt.
If this is the case, it is advisable that you clean up your credit and clear up existing debts before you apply for a new loan. Eliminating a bad credit rating is not an overnight process, but clearing up your debt is a good start to get back on the right financial track.
You can utilise a balance transfer card for this purpose.
You may also consider taking up a personal loan to help you better manage your debts. While taking up a loan to cover up your debts may seem like an ironic thing to do, it could be your way out of a financial quagmire.
For instance, if you currently have a few outstanding debts, it makes sense to consolidate your debts into a single lower interest personal loan. One major advantage to this is that when the loan agreement is signed, the interest rate (which ranges from 4.5% to 13.75%) is fixed for the entire loan repayment period. This means that your interest rate will not fluctuate or compound, and your payments will always remain constant.
You will also have the ease of managing just one repayment instead of multiple, making debt management a much simpler process.
You may also engage the help of the Credit Counselling and Debt Management Agency (AKPK) if you are having a hard time managing your debt.
Banks or dealerships?
Which one offers the cheapest loan rates? Unfortunately, there is no magic answer to this.
However, one thing you need to keep in mind is that dealer financing is also bank financing. The only real difference is, the dealer is doing the legwork for you by going to the bank.
Also, dealerships earn commission from the lenders when you get financing through them, so it is typical for them to mark up the rates.
But don’t discount dealer financing just yet, as they’ve been known to offer very low rates – including 0% – as part of a promotion. This usually only happens during festivals, for new cars or for models that aren’t selling particularly well, but it’s a rate that banks will not be able to match.
Sites like Carsome.my enables car buyers to compare pre-negotiated offers from certified dealers. Car buyers who made purchases through their platform have also seen an average savings of RM3,000 off retail prices.
Meanwhile, the main advantage of obtaining a car loan from a bank is that it doesn’t mark up its interest rates (like dealers tend to do). Also, since you’re dealing directly with the lender without a middleman, the rates are likely to be better.
The smart thing to do is to go to your preferred bank first before you go to a dealership. That way, you can compare both rates before you make a decision.
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