I’ve heard this complaint many times. I am one of those who complain about this too: “The cars are so expensive in Malaysia.”

Well, to what extend the high pricing of consumers vehicles in Malaysia? Let me first tell you my experience chatting with an American over breakfast.

This happened on 28th July 2012. In the beautiful morning, I drove 10 miles to Portland, Oregon to meet Noah Brockman, a business coach who had just helped me on my online project called Founder Method, which is a membership site providing guidance to Malaysia entrepreneurs.

We sat down in a fine restaurant. We shared information on a lot of stuff and eventually we got to the point of discussing the difference of lifestyle standard between Malaysians and Americans.

“For a Honda Civic, how much do you think I pay for installment every month?” I asked. I sold this car before I moved to stay in the USA for 12 months.
“About RM1500?”, Noah took a guess.
“Wow, how do you know? I paid RM1,425 every month. It’s pretty close!”
“I don’t know about the price in your country, but here, a Honda Civic cost around US$17,000. With zero down payment, it will be around $1,500 to pay it off in one year.” Noah explained his calculation.
“Damn! My installment is for a 7-year loan!”, I exclaimed.

Why is a car priced higher here?

Without blaming anyone, let’s see the taxes imposed on the vehicles here before hitting the road. There are import duty, excise duties and sales tax being imposed on cars.

Motor Cars (Including Station Wagons, Sports Cars and Racing Cars)

Import duty

     

Local taxes

 
 

CBU

 

CKD

 

MSP

 

CBU & CKD

 

Engine

Capacity (cc)

MFN

ASEAN

CEPT

MFN

ASEAN

CEPT

MFN

ASEAN

CEPT

Excise

Duties

Sales

Tax

< 1,800

30%

0%

10%

0%

10%

n/a

75%

10%

1,800 – 1,999

30%

0%

10%

0%

10%

n/a

80%

10%

2,000 – 2,499

30%

0%

10%

0%

10%

n/a

90%

10%

Above 2,500

30%

0%

10%

0%

10%

n/a

105%

10%

Notation

  • CBU = Complete Built up
  • CKD = Complete Knock Down
  • MFN = Most Favoured Nation
  • MSP = multi-sourcing parts
  • n/a = not applicable.

Source: http://www.maa.org.my/info_duty.htm

These taxes are also one of the highest in the world. This makes most foreign cars extremely expensive for the local buyers. These explain why a Honda Civic here cost RM120,000 meanwhile only US$17,000 in USA.

Malaysians pay a lot for cars

It is a commonly known fact that a young fresh graduate might be paying 30-50% of his salary just to own a car that seems like a necessity, especially if you are working in the big cities.

For example, if you get the lowest specification Perodua Myvi model (manual 1.3 liter, solid colour) priced at RM41,924.30 on the road, zero down payment, and 9 years loan repayment, your monthly installment is RM489.51.

Source: http://www.autoworld.com.my/v2/tools/loan_payment.asp

Now add on the petrol, toll fees, parking fees, and maintenance expenses, you’ll most likely spend around RM800 per month just because you own this car. For a fresh graduate earning RM2,000 a month, RM800 is 40% of your salary.

Don’t sweat. I’ll be giving you some suggestions below in order not to overspend on cars. Since we can’t change the National Automotive Policy on our own, the logical thing to do is to play within the rules. There are many ways to spend less on car including not to get a new one, or not to own one at all. Either way, it involves living below your means.

Now let’s get to the question we are discussing on this article – how much should you spend on a new car?

How do you know if you can afford a new car?

The answer is the 20/4/10 rule. Michael Kling at Wise Bread (personal finance blog) shares this easy-to-remember rule:

  • Put down at least 20%
  • Finance the vehicle for no more than four years
  • Keep total monthly vehicle expense — including principal, interest, and insurance — under 10% of gross income

Apparently, Michael is living in the USA and he is talking about a different living standard.
But the principles hold true for us who are living in Malaysia. If cars are expensive, it simply means we should get cheaper options.
Car-Purchase-20-4-10-Rule

If you are following these rules, before buying a Myvi, first you got to have at least 20% down payment ready in your bank account, which is about RM8,400.

Secondly, by financing the remaining 80% on a 4 years hire-purchase loan, you’ll be paying RM779.79 per month.

According to the third rule, you got to keep your total monthly vehicle expense under 10%. By excluding the maintenance, petrol, toll and parking expenses, you got be earning around RM8,000 a month in order to afford a new Myvi.

Okay. I know this is kind of hard to swallow. How many years do you need to climb the corporate ladder in order to get to the income level of RM8,000 per month? Some people take as long as 10 years to get there.

The millionaire next door is driving a Myvi

The truth is that there are many frugal people driving a Myvi in Malaysia. I’ve heard a story from my friend, Lee, who is a top level manager of a property development project in Penang. He told me that a middle-age man drove a Myvi to his office. That guy went in wearing short pants, and bought 8 units of RM400k/unit properties in one shot! You see, even the millionaire next door is driving a Myvi.

So if you are not earning more than RM8,000 a month but drive a car as good as Myvi or even better, you really need to take a close look at your finances. Are you heading towards the right direction?

Car Loan vs Housing Loan Psychology

After paying many years on both car loan and property loans, here is the main difference I realized – it is totally the opposite feeling when you pay the nth installment.

The feeling of paying a car loan

  • 1st installment – “I pay so little to enjoy such a nice ride! Totally worth it.”
  • 50th installment – “When is the final payment going to come? I am tired of this old car.”

The feeling of paying a housing loan

  • 1st installment – “It is going to take forever to pay off this mortgage.”
  • 50th installment – “Oh… I am paying so little to enjoy this expensive home.”

The answer is obvious – don’t buy a car you can’t afford. Until the time you can really afford your dream car according to the 20/4/10 rule, you might be interested in one of the money tips I shared in my bestselling book Top Money Tips for Malaysians – How to get your first car free. Check it out 🙂

How Much Should You Spend on a New Car in Malaysia

Downloads


KCLau
KCLau

Personal finance author and trainer

    31 replies to "How Much Should You Spend on a New Car?"

    • Jackson Tan

      Hi Kc Lau, I’ve been eyeing on BMW M4 which now selling around rm300k to rm400k depending on years. Based on the math, at least need a rm70k/month income. Am I right to say that ?

      • KCLau

        Luxury car is an indulgence. You can pamper yourself when you have the money to burn.

    • James

      Hi KC, I aware this article written in 2013.

      However there is an article written by Ian Tai in your site with title “should I take 5 years or 9 years car loan” suggested to take longer car loan which contradict to your mention here that you advise to take loan not more than 4 years.

      Highly appreciate if you could be so kind to clarify further on this matter.

      Thank you

      • KCLau

        Hey James, when you know how to get better return than the interest charged by bank (in Ian’s analysis, 9 years loan is has lower effective rate), then it is more beneficial to take the longer loan. As you will make your money work harder in that case.

        However, this article discusses about measuring the affordability of buying a car. You can follow the guideline here to check your affordability of car purchase. Then when you take the loan, you can do 9 years instead. But for those who don’t invest, or don’t know how to invest for higher return, then the shorter the loan, the better it is for them.

    • Eric

      Interesting based on my spreadsheet assuming that interest is 2.9 p.a. that would mean you would need to earn 500k per year to afford a 224k BMW 3 series looks like a lot of people have bought a car they can’t afford

    • Ashraf

      Great piece of info for someone like me looking forward to buy a new car.

    • Leon Ong

      It’s true that we shouldn’t be spending more on cars than we should as they are more liabilities than they are assets. I understand where you are coming from and personally, I do agree with you. That is why I’m now in one big dilemma (since I’m thinking about changing my car soon) Here’s why:

      1. Putting up a good front
      While owning good and expensive car may be a blow to your personal financial standings, they do provide (however superficial this may sound) a good front to your day to day customers if you’re working in a sales or business line. I had friends try to meet up with customers and got outright pointed out for driving an old myvi to pick them up.

      2. Safety
      I strongly believe this is an issue… especially if one needs to travel alot through highways (4~8 hours drive at a go). Local cars just don’t have enough airbags and the standard ones come equipped with just 2. Even then, the durability of their chassis in case an accident happens is questionable at best. I’ve seen enough proton sagas or perodua vivas or myvis in collision with continental car to know the odds of their survival. The fear here is cheaping out on cars when that extra 20-30k could potentially save lives. And even if we are more careful when driving, we could never predict when other drivers drive recklessly.

      3. Ergonomics and comfort
      Again, this applies for those driving long hours on the road down big highways. Local cheaper cars just don’t come equipped with good lumbar supports or cruise controls. Not sure sitting or driving uncomfortably would result in the long run, health issues like backaches and etc.

      4. Cliche YOLO factor
      You Only Live Once. I’m at an age where I start to see my friends ‘move on’ so to speak. It’s good to have ample amounts of savings, strong portfolios and whatnot. But we could never know what would happen a year from now or ten years from now or heck, an hour from now. I had friends who lived thriftily for all their lives, saving and planning when sometimes got overboard doing so…. then only to find out a couple of years later that they had stage 4 cancer or met with car accidents and well… ‘moved on’.

      Just my 5 cents… so what do you think? Should we go with the 10% rule or is it sometimes okay to venture into the wilder 20-30% rule?

      • KCLau

        Hi Leon, great sharing from you. I also agee with what you say.
        So it is a balance of what you pay and what you want to get.
        Can always go for cheaper imports, although used for a few years, but still it’s safe to drive and give comfort too, and still not too high in maintenance expenses. You know what brands we can rely on.

    • Jeng leng zai

      Great sharings! Like someone did up there, i hv been driving used cars so to avoid interest-added tax with no more than 4 yr loan. I always bring my 2 bff who specialized in painting and car repair to choose an used car with me followed by a great yum seng moment with them as appreciation. I always opt for a brand that comes with great reliability, safety, and comfort. Buy one that comes with full records from service center. New car is just a few months new car feeling thingy. As you said, is not easy as i always got tempted to buy brand new conti. I got countered by a fren who told me something which i kind of agreed. He said save so much for what. Enjoy life and dun wait until our kids “burn” one bmer for us when time comes…

      • KCLau

        The thing you mentioned about “having the full records from service centre” – which is very important also when it is time for you to sell the car. The car dealers also ask for the service book record to make sure the vehicle is serviced at the authorised service centre.

    • wong hui chiun

      Useful tools for before buying a car. I always think that buying property first is always worthwhile buying a car…as vehicles depreciates yearly..while property appreciates yearly. Good comments!

    • Rajan

      Good article. Thanks

    • dinie

      i wouldn’t buy 2nd hand car because we are not sure when will the govt going to apply the 12 years limit age for cars

    • […] Want to know how much you should spend on your next car, read this article. […]

    • Norman

      Hi KC,
      I enjoy the reading & do agree with you but at some point we need to think of our safety too. Example: Just imagine a millionaire next door drove a Kancil because investment in property is the top priority above all for him. One day he involved in an accident, head on collision & died. (by the way, the accident was not cause by him, but by other reckless Camry driver.) Due to the small size car & lack of safety feature this millionaire “mati katak” & not able to enjoy the fruit of his investment. Probably, if he own a Perdana, he might just sustain a minor injury & live to tell the story. Here, we need to swallow whatever policy the government implemented & of course sometime it is not fair at all. We also need to work 5 times harder than the American to own the same car. I was in Portland for 4 months & drove several standard size car rented by my company. So I know how it feels like when return from the state. Really pity for Malaysian because of the policy, most of us are at higher risk on the road with the so called cheap RM40k lack of safety car. Therefore, I think we need to invest wisely as well as take care on the safety factor since that we are on it almost everyday.

      • KCLau

        Well said Norman. Safety is also very important. In fact it should be the first priority. If safety comes to mind first, for the same budget, one should probably buy a used car that has airbag. For example, a 1996 Honda CRV is only around RM27k

        • Ovi

          KC
          You right and I tried.
          But driving second car just don’t give that secure confidence while on road.
          You will end up taking off from pedal to reduce speed and seeing myvi the other line taking over.
          Because worry something wouldn’t secure life and leaving family abandoned forever.
          The other way round for this would be getting it better by proper but cheap maintenance. …do u have any idea for it?

    • Eddy

      Hi KC,

      To be fair to Malaysian, I feel certain of the US ideology is not 100% applicable here… Yes, the Myvi example is true as I have also come across a lot of this type of people, but then in Malaysia an entry car is already RM40K minimum,talking about decent proton saga… After a few years, the so call Potong car maintenance is not going to be cheap…

    • Clark Kent

      What you wrote is true, but it would be very difficult many to follow. Especially when we are already used to it. The only way to control this is to limit car loan to 4 years, then only a person would really think whether the car is too expensive for him/her or not.

    • Asohan

      Dear KC,

      Sounds great. I have never owned a brand new car since I started working. I have always felt the government robbing us from owning a new car. Hence I use a second hand car to allow someone else to take care of the taxes and depreciation. Furthermore, it is ridiculous to buy a brand new car and finance the car including financing the tax portion.

    • Albert Choong

      Yes I totally agreed with you. Saving money from buying cars have you an opportunity to grow your money to build up the capital base for your route to financial freedom…

    • Wei Cong

      Thank you!! I gain a lot of knowledge from you. Between, I am currently a university student now, and i wish to start investing, which type of investment would you recommend?

    • Tawaraja

      Good at article, right when I am looking forward to replace my aging car. However, how did the taxes ended up being so high ? Is it set internally within Malaysia or there’s a committee of countries that sets the rate ? Any chances of the taxes going down, or becoming a rebate in income tax like purchasing a new PC ? Cheers.

      • owen

        Well Tawaraja, in ASEAN countries including malaysia are in collaboration under AFTA which is Asia free trade area. In 2007 if im not mistaken, many countries like thailand and indonesia and etc has lowered their import duties on cars to trade among asean countries to help in boosting motoring economy. Having said that, partially CKD vehicles and spare parts are created for better cheaper value. But during the agreement of boostering the motoring among asean region, malaysia opted for stepped reducing excise and tax as to protect the national motor company. Thus, the value of tax and excise % is remain highest among all countries.

        I may not be right but from my point of view stated above is the current policy which impose by our internal affairs, MITI.. malaysia international trade industry. That is why we have AP’s to show black and white clearly on taxes and excise duties.. whichever the fact that the AP should be abolish..during the conference.

        Undeniably this is partly political and i think discussing how should we reduce taxes n duties should not be questioned but kclau ground question on how do we calculate our money to see if we are able to cover the taxes n duties is affirmative. We have no say on these relevant taxes and duties but just to follow and see if it is agreeable to harness the tax n duties value when u buy a car. Just my 2 cents.

    • Essential Motoring 101

      Very well laid out article about owning a car in Malaysia. People always have that stigma about how bad used cars could be and all that negativity. To me, used cars are also a great way to save money on owning a car. Of course, get ready the cash to do up the car upon taking delivery of it. But, after all the replacements and touch-up done, the car is good as new, maybe better! A used car around 3-4 yrs old is a bargain! Although interest rates may be higher but on the monthly repayments, the amount is lower and it gives better cash flow to the owner.

    • ZFS

      Living below the mean. It’s conventional wisdom, which it works, but i think it’s not so relevant in current generation anymore. You can find many youngster who understand the logic but simply can’t execute it anymore simply because of social proof. More realistically is being moderate and keep increasing your earning power, which also means how much you earn does matter as compare to how much you save, especially living cost in Malaysia increase faster than earning power, you can’t cope for too long maintain the same earning. That uncle who drives a myvi and a row of condos is probably extreme frugal case. Even if he drives a 3 series BMW can also consider as moderate to his earning power.

    • Aun Tiah

      Many people nowadays tend to live beyond their means.Your advice is very useful. I hope more people read your postings.

      • KCLau

        @Aun, it is a materialistic world. The temptation is hard to overcome.

    • LAI SENG CHOY

      Car’s value depreciate year on year. If you own a not-so-popular car, the depreciation could be even higher. So, what is the message here? Since depreciation takes away the value of your car, it means you are spending your money without return. Yes, you will be the loser and car makers are always the winners. Therefore, buy a car that you can afford to meet your daily needs should be the way. In other words, meeting your daily needs is your return. Therefore, only buy car that you can afford. Don’t overdo it 🙂

      • KCLau

        @Lai, well said!

      • erique

        I totally agree! I’ve always told my family and friends, buy the best car that you can afford, and that’s that! 🙂

Leave a Reply

Your email address will not be published.