If you are in the market to buy a car, you likely fit into one of two categories of people: those who are looking to buy a reliable vehicle at a good price, or those who thinks that a brand-new vehicle is the best option. Regardless your opinion, there is no doubt that buying a car in Malaysia is a pretty pricey affair.
While a car is usually one of the first big purchases most Malaysians make, the decision-making process is a very daunting one as we navigate various car variables – cost, affordability, protection and maintenance, among many things – that come into play.
Be it new or used, a better buy for a car would depend on the buyer’s budget or appetite. There is no absolute right or wrong in this case because it is a matter of preference and it depends also on one’s cash flow, opines Sazali Abdul Rahman, Head of Franchise, Allianz General Insurance Company (Malaysia) Berhad.
“Obviously, whether buying a new or used car, there are various pros and cons to consider. The advantages of buying a new car are that the parts come with warranty, the interest rates are lower, and that there’s a lower margin of financing as the manufacturer deals directly with the financial institution. On top of it, of course, is the fact that new cars would also use the latest technology,” he explains.
On the other hand, he adds, buying a used car can come with a high interest rate as well as low margin of financing and strict lending guidelines due to increasing levels of household debts.
Of course, when it comes to insurance, used cars would cost less compared to new cars as a used car has already depreciated and the cost of insurance would depend on the value of the car.
For example, a brand-new national car costs RM50,000 and the price of the car after a usage of 10 years would be RM16,000, which means that it has depreciated in the value of RM34,000 and at a rate of 68%.
Affordability and Hidden Costs
In today’s climate, most Malaysians earn an average starting salary of RM2,500 to RM3,000, and when combined with escalating cost of living especially in the city, the ability to afford a car – new or otherwise – dwindles.
“When purchasing a car, you have to ask yourself two important questions – ‘Do you need it?’ and ‘Can you afford it?’”, said Hann Liew, Founder and Director, RinggitPlus Malaysia during a recent roundtable session which saw RinggitPlus, Allianz General Insurance Company (Malaysia) and Bosch Automotive Aftermarket Malaysia coming together to discuss and provide insights on financial planning, vehicle protection and car maintenance factors and their cost-benefit perspectives on car purchases.
“The biggest misconception most first-time buyers have is that as long as you can afford the down payment and the car loan instalments, you are in the clear,” he said.
Liew further stressed that there are in fact many hidden costs that ought to be factored in while determining one’s ability to afford a car.
These hidden costs create a sum called Total Cost of Ownership (TCO) that includes depreciation, interest, petrol, parking and toll, insurance, road tax and car maintenance on top of the down payment and loan instalments. F
Getting a Car Loan
An automobile is a depreciating asset that loses value as the years passed by. On average, explains Pauline Yong, a licensed financial planner with Philip Wealth Planner Sdn Bhd in Johor Bahru, it depreciates on average 10% per year for new cars and 5% per year for used cars.
“The rate of depreciation usually accelerates during the beginning years of a car, which explains why the used car depreciates at a slower rate than a new car,” she points out, further noting that one important financial planning aspect of owning a car by instalment is that the cost of borrowing is rather high as it is calculated based on flat interest rate for the full loan.
But while a home loan is calculated by the Reducing Balance Method, which is a method used to calculate the total interest for housing or mortgage property loans with the interest being calculated based on the outstanding loan amount after periodic repayments, the manner in which a car loan is calculated is different altogether.
“A car loan is calculated based on the total amount of loan that you have and the interest is fixed. For example, for a RM40,000 loan, the interest calculation is RM40,000 x 4% X 9 years. The principal is fixed unlike the mortgage loan which is reducing. Hence, the effective rate of a car loan is almost doubled from 4% to 8%,” she explains.
“In addition, new cars generally require less down payment (10% or below), while used cars need to fork out at least 20% of cash upfront to own a car due to the bank borrowing policy. Hence, cashflow-wise, a new car is actually more ‘affordable’ to the young working adults,” Yong adds.
To calculate how much you can pay for your car instalment:
- Firstly, determine the amount available for fixed monthly expenses which is 60% of net pay;
- Then minus all the fixed monthly expenses;
- That’s how much you can afford for your car instalment!
Note: Amount available for car instalment = (60% x Net Salary) – all monthly fixed expenses
However, Yong does not encourage young working adults to spend too much money on a car which is just a means of transportation and recommends, instead, that they follow a simple budgeting rule: 60: 30: 10.
“As a rule of thumb, do not spend more than 60% of your take home pay on your monthly fixed expenses such as housing and car installments, utility bills and other fixed monthly commitments. Limit your leisure expenses such as shopping, eating out, and entertainment to 30% of your net pay. Then the remaining 10% is for savings,” she concludes.
The Financial Factor
Just like buying a home, buying a car is an important decision that can be rather daunting, especially when it comes to the financial planning aspect of things.
“The ability to repay the instalment should be thoroughly considered,” says Kevin K.M. Neoh, a financial planner with VKA Wealth Planners Sdn Bhd.
“Buying a car and stretching your hire-purchase loan to a lengthy 9-year loan makes the purchase affordable, but at the same time, it also ties the purchaser down for a very long term down the road. What’s worse, you might still be servicing the loan even when the car or technology has evolved, or become obsolete.”
Neoh also points to the amount of down payment one should put on a car as an important factor. “It is in the best interest of the purchaser to try to pay more than 10% of the purchase price. This is simply because the resale value of the car will likely outpace the speed where the outstanding loan gets reduced.
“That being said, the lesser loan we take, the better. You don’t want a situation whereby if you sell your car a few years later, you still owe your financier (bank) a sizeable sum of money because the proceeds from your sale is lower than the outstanding money you owe the bank. Therefore, coming up with a higher down payment makes sense as it means we will borrow less.”
Neoh further notes: “Upgrading your car to one that has better technology or nicer leather seats may sound or look cool, but if it means having to pay an additional RM100 or RM200 a month to your hire-purchase instalment, this same amount of money will have worked better mileage for you when it is put into investment assets or instruments that have the potential to grow and appreciate in value.”
So, what is the most important financial planning advice that one needs to adhere to in order to not get overextended when buying a car?
“Make use of the Debt-Servicing-Ratio (DSR) to gauge if buying a certain car with a higher price tag (which also translates to higher borrowing) makes sense. DSR tells us how much from our take-home income will be used to service our loan. Bumping up our DSR today means we are taking away the money from our future selves,” Neoh advises.
This will also mean, Neoh adds, that the ‘you’ in the distant future will have to put in the same effort at work but have lesser to spend because the ‘you’ in the present have made the decision to spend the money before it is even earned.
“If buying a certain car will carry your DSR to a danger zone, it means that you are putting strain and stress on your financial stability. Try not to let your DSR go above 50% of your take-home income (this is inclusive of all loan liabilities such as, for instance, your PTPTN and mortgage).
“If your DSR is at 50%, this means that if you earn RM3,000 a month you would only have RM1,500 for your other lifestyle needs as the other half is reserved for your car loan repayment. If you are comfortable with this, then it’s fine, otherwise you should always strive for a DSR that is lower than 50%.”