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Car loan: What can you afford?

YOU'VE saved up some money to buy a new car. Having done the rounds at car showrooms, kicked a few tires, taken several test drives, you've finally decided what car you want. Before putting down the deposit, consider first how you would finance the new car.

Owning a car can be costly. Besides the loan repayments, you would also need to budget for regular expenses such as fuel, maintenance, spare parts as well as insurance and road-tax renewals. If you use toll roads often, the toll charges need to also be added up.

Upgrading your current car to a larger capacity vehicle, say from an 850 cc Perodua Kancil to a 1.5 litre Proton Persona, would incur additional monthly costs that can be quite significant. Fuel costs alone may be higher by as much as 50 per cent. Doing the homework first would be well worth it to determine if the new car is really affordable. Avoid the mistake of assuming that the recent RM500 pay raise you deservedly got would mean that you could afford as much in additional installments to buy a more expensive car.

So how much car loan you can afford? Running a car is usually the second largest monthly household expense, after rent or home loan repayment. As you also have other bills to pay, including groceries and utilities, a reasonable budget for your car would be 20 per cent of your gross monthly income. This should include insurance and road tax renewal costs, which can be significant and easier for you if a little money is put aside every month.

There are people who do not have the usual monthly household expenses. If you are single and living with your parents, you may be able to afford a bigger budget for your car. But having a budget is still important, as you would want enough money left over for other things that you enjoy.

Knowing your budget will help you decide what car will be affordable. You can use the many car loan affordability calculators online for an idea of how much loan you can take based on your monthly budget. This will also be handy when working out the financing terms with the bank. For example, you could extend the loan period to reduce the monthly installments to fit your budget. But be aware that you would be paying much more in interest in such a situation.

A new car is very much a commodity item. Every dealer can offer you the same car at the same price. However, car loans offered by the banks are not. Check with the banks on how much loan you would actually be eligible for. In Malaysia, hire purchase financing is commonly used when buying a car for private use. As the name implies, you are hiring the car from the bank for an agreed time, at the end of which ownership of the car is transferred to you once you've completed all the payments.

Some car dealers can arrange the financing for you, but you won't know if its the best unless you've done your homework. For example, a 0.5 per cent difference in interest rate on a seven-year RM50,000 hire purchase loan would save you RM1,750 in interest payment. Did you know that some banks charge different interest rates for different car makes? Check if the car manufacturer has a special financing arrangement with the bank.

When selecting which bank's hire financing to use, you may also want to consider other value-added benefits offered. Some banks give special motor insurance packages with their car loans. What you would also want is efficient processing of your loan application, and the ease of making repayments using whatever method that is convenient to you.

Maybank, for example, provides multiple ways for you to make your monthly repayments, including at its branches, on the internet, over both mobile and fixed-line phones, and through its ATMs.

Having sorted out your financing needs, you are now in a better position to make the commitment and place an order for that spanking new car.


1 Based on wants, not needs

It's too easy to buy the hottest-looking car on the lot. Spend a few rational moments writing down how you'll actually use the car.

2 Budget based only on monthly payment

Put together a budget to decide exactly how much you want to spend on a monthly basis.

3 Start talking trade-ins right away

If you want to trade-in your car, don't tell your sales person until after you've negotiated the price of the new car.

4 Not investigating car dealer

Do as much research on the car dealer as you do on the car.

5 Sticking with dealer's loan

If you've got the right dealer and the right car picked out, take a few extra days and make sure that you've got the right car loan.
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