Discussion : choosing 9 year loan despite high income??

[schnolhamor]

I know of the typical car loan advice : 15-20% salary, no more than 5 years loan, if not it means you can't afford this car etc. I used to think this made sense, but now I'm not so sure.

Just for the sake of discussion, consider the following:

Car amount 100k

Downpayment 10%

Interest 3.2% pa

5 years loan : 1,740 monthly. 104,400 repayment. 14,400 interest paid

9 years loan : 1,073 monthly. 115,920 repayment. 25,920 interest paid

Scenario 1 : earning 5k monthly.

• 5 years loan hurts a lot, one third of salary goes to the car.
• 9 years loan brings the monthly payments to 21% of salary, which is actually a reasonable amount to pay, if you ignore the much higher total interest paid.
• Discussion : in this situation, would you say the car is too expensive, or take the 9 year loan and pay a reasonable monthly repayment, taking the high total interest?

Scenario 2 : earning 10k monthly.

• both 5 or 9 year loans are well within the means.
• Discussion : in this situation, is the 5 year loan wiser, as you pay less interest in total, or the 9 year loan wiser as it gives you ~700 more cashflow each month?

Asking this because I have a friend who has very high income but bought a car with 9 year loan because he wants to see the lowest monthly repayment possible (despite his very high income).

 

[ralphalvarezz]

@schnolhamor Obviously most here would say get the 5 year loan because they do not want to pay more interest to the bank

But I also went with 9 year loan despite being able to afford a 5 year loan. This is because of

1) cash flow as you pointed out. As I regularly dca into stocks, cash flow is super important to me.

2) I feel the higher interest is offset by inflation. As in as I am paying example 20k over a longer period, the 20k is not worth the same today

3) and seems odd to me to sacrifice the cash flow for a depreciating asset

I may get downvoted to hell for this blasphemy in this sub though

 

[cas]

@ralphalvarezz I’m with you, esp since the interest is paid by the company. 9 years give me better cash flow, thus I can invest more, and I don’t intend to sell my car 5 years down the road.

 

[muslim_terrorist]

@ralphalvarezz That's assuming your stocks has higher returns than the loan interest rate right? Not a bad bet considering s&p500 has a yearly 10%pa. So by choosing a 9 yr loan, you don't lose out on a certain amount of returns? If you take a 5 yr loan, you'll lose out on making more money. Is that the logic?

 

[ralphalvarezz]

@muslim_terrorist Yeah. By paying more money today, you are basically losing out on opportunities, be it stocks , epf or own business.

It doesn't even have to be an investment. If someone had the foresight to convert myr to usd/sgd 9 years ago, there would also be handsome forex gains

 

[russman]

@muslim_terrorist Even epf interest is higher than the car loan

 

[revtyl]

@ralphalvarezz I'm with u on this. Esp if ur doing sales or need some 'face' in ur line of work.

 

[minnietaz]

@ralphalvarezz Great justification for a 9yr loan. But is there any rules u apply to the car? Like no selling in the span of 9 yrs until car is fully paid?

 

[ralphalvarezz]

@minnietaz You don't actually have to keep your car for the full 9 years.

You may need to keep it for the first 4 to 6 years to skip the period where the car depreciate the fastest. This is to ensure your sale proceeds can cover all or most of the remaining loan to the bank.

Also you would need time to ensure your investments from the cash flow already have sufficient return

This is my personal experience of course. YMMV, depending on what car you buy and what investment you dabble in

 

[lottolady]

@ralphalvarezz Nah you're good. This is a totally valid choice.

 

[loraine]

@ralphalvarezz This…

 

[ineedadvice101]

@schnolhamor If you can't survive without the extra cashflow, the car is not affordable. Income has nothing to do with it.

 

[jmh96]

@ineedadvice101 Agree, this is not a money problem it's a behavioural problem.

When you start looking at only monthly repayments instead of the bigger picture you'll be forever stuck in the cycle.

 

[j1994]

@schnolhamor I actually took a 9 year loan for a x70 with a 50% downpayment despite being able to buy the car outright. Took the excess cash and invested it instead. 3 years later lucked out and made enough profit from that investment to payoff the balance and still retain the principal and some profit on top of it.

So yeah, it can pay off assuming the excess cash goes entirely into investments.

 

[karubin]

@j1994 The problem here is that people are not disciplined enough to invest their extra cash flow, which is very common with FOMO behaviour amongst Malaysians.

 

[jmh96]

@j1994 Keyword here is lucked out. Things can go the other direction very quickly. And if it does now you have double the amount to pay

 

[j1994]

@jmh96 Yes, that’s true of all investments.

 

[beautifulchristianone]

@schnolhamor My situation - 10k gross. Bought a 100k car with 9 year loan. Reason, i dont plan to use the car for full 9 years. Maybe will sell in 5 years. Previously did this and i manage to sell my car higher than balance loan.

2) Rather to have a lower commitment every month as this will free up my dsr to purchase house.

3) Also, along the years, myr gonna drop further and further. 20k interest now may worth lesser in 5 years or 9 years time anyway.

4) never know what will happen tomorrow. So fast paying off your loan for what?

Above is just my view. Not verified using any solid maths formula.

 

[revtyl]

@beautifulchristianone made 5.8k gross in 2019, bought 125k car with 9 year loan

reason: plan to use the car for full 9 years or beyond, as i was not a petrolhead, i can't be seen with a local car or else clients will not have good impression.

result: more clients have confidence in me (often have to drive out to meet clients / fetch clients around), able to set up own company and can afford to pay off the car loan and buy a new car, but decided to baristafire.

numbers wise everyone is playing it very safe with those 'general rules' but in sales line u often need to use money to earn money.

 

[ralphalvarezz]

@beautifulchristianone 4 is a very good point. A lot of people make the same mistake for mortgage as well.