Lately, I hosted a webinar with KC Lau on purchasing a car. Out of which, we did touch on a few highly debatable issues on financing the car purchase. As such, I will revisit them and share my own personal views on them. They are as follow:
#1: Down Payment
If you intend to buy a RM 100,000 car, would you prefer to:
a. Pay RM 100,000 in cash for it without obtaining a car loan?
b. Pay RM 10,000 in cash for it and finance the rest of it with a car loan?
There are some who prefer the former over the latter as they intend to be debt free. If they do not have RM 100,000 in cash, they will place a larger deposit for the purchase of their next car as they want to save on interest costs. Personally, I respect that. If I intend to buy a RM 100,000 car, I would choose the latter and will obtain a car loan. Why? This is because, if I pay out RM 10,000 only, I would keep the other RM 90,000 which can be used as:
a. Reserve funds to service all other debt commitments and living expenses.
b. Funds to invest to generate passive income.
c. Emergency funds to meet ad-hoc or unforeseen expenditures.
So, are the above justifiable enough reasons for you to keep the RM 90,000 and incur a 5%-6% interest cost per year in effective interest rate on your car loan?
That, I’ll leave it to you. For me, the answer is a resounding yes.
#2: Loan Tenure
If you are to obtain a car loan of RM 90,000 at 3% flat interest rate per year, the question is, ‘Will you obtain a:
a. 3-year loan, where the instalment is RM 2,725 a month?
b. 9-year loan, where the instalment is RM 1,058 a month?
I had noticed some with the same reasoning of wanting to be debt free as soon as possible and save the amount of interest payments will opt for a 3-year loan.
Personally, I would choose the latter. This is because:
a. The effective interest rate for both loans are similar at 5%-6% per annum.
b. I will have a lower debt-service ratio (DSR) if I opt for a 9-year loan.
c. I will have an easier time to service my car loan if my income falls.
From all the above, I will place a greater emphasis on keeping my DSR low. Why so? This is because I prefer to use debt to finance the purchase of assets, which could generate increasing and recurring income, hold and appreciate in value in the long-term. Real estate is an example of such an asset and one thing about it which I find it to be absolutely awesome is this:
Interest rates for mortgages are lower than interest rates for a car loan.
Therefore, I would prefer a 9-year loan to reduce my monthly debt repayments, reducing my DSR, thus, effectively allowing me to have higher loan eligibility for purchases of income-producing, value-appreciating real estates in Malaysia.
#3: Maximum Car Price
How to determine the maximum price one should pay for a car?
To me, that really depends on what actually a car is to you. Is a car merely just a transportation vehicle, allowing you to move from one place to the next? If that is so, we will probably find a lot more Protons and Peroduas on our roads. It is a possibility that there will be fewer Mercedes Benz, BMW, Porsche, so on and so forth on our roads, especially if we do not view a person based on what type or brand of car he owns or drives today.
But, the above is not reality. In my opinion, we do judge, even subconsciously.
We tend to perceive one who drives a Mercedes Benz to be richer than another who is driving a Myvi. That perception may be true but who says, a Myvi owner cannot be richer or wealthier than one who drives a Mercedes Benz? You never know who is richer than who because looks can often be deceiving. This means that:
a. A person driving a Mercedes Benz can be richer than one driving a Myvi.
b. A person driving a Myvi can also be richer than one driving a Mercedes Benz.
What car a person drives does not actually determine his level of wealth.
But, why would a person buy a Mercedes Benz or a BMW or a Ferrari and so on and so forth even if the person could be really broke after buying them?
I believe these buyers attach different values or meanings to what a car is.
So, you have got to be clear of the values that you attach to having a car. To you personally, does it mean:
b. You have become a Man or an Adult?
c. Belonging to an exclusive club membership like the Ferrari Owners’ Club?
How much are you willing to pay to have the above? Is it worth it for you to get a multi-year loan for them? I’ll leave this for you to decide as the maximum car price that you would pay for will be largely determined by the values you would attach to having a car itself.
Maximum Car Price < 4 Months Worth of Income?
In our recent webinar, KC Lau himself has revealed this formula where the price to pay for a car, at maximum, should be lesser than one’s income for 4 months.
This means, if you earn RM 5,000 per month, the maximum price of a car which you could afford is RM 20,000. I’ve checked. A brand new manual Perodua Axia (Axia 1.0E), which is the lowest specification of the model, costs RM 23,367 and thus, making it not really affordable among one who makes RM 5,000 a month.
Yea, it raised my eyebrows and the eyebrows of many viewers too.
I’m very sure that most people had failed and will fail to follow this formula. So, let’s tweak it a little by me asking you this question:
How many months of income would you ‘sacrifice’ to pay for your car?
Would it be 12 months, 18 months or 24 months?
This means, if today, you earn RM 5,000 a month and are willing to sacrifice 12 months to buy a car, then, the maximum car price for you would be RM 60,000. If it is 18 months, then the car price is RM 90,000. Finally, if it is 24 months, the maximum car price would then be RM 120,000. So, the question that you could ask yourself is, ‘How long would you want to slave for a car?’
For more details of our discussion,