Need some financial advice regarding my first car purchase

[astrocol]

Hello, need some advice from you guys.

Basically, i am planning to buy my first car soon. And this is where i need an advice from you guys.

I am planning to buy a Honda City Hatchback V spec or Toyota Yaris G spec. I am going to put 30% or 40% downpayment and take 7 years loan only. This is the part where i get confuse from my friends opinion.

Friend A suggested: Pay 10% DP, take 9 years loan, keep the remaining cash and invest or put in ASB. Reason being from him; Car interest loan is small and bank also have early settlement discount if want to resell the car, have cash in hand is better

Friend B suggested: Pay high DP (30 or 40%), shorten the loan with the bank so that can settle and finish the loan faster. No headache with the bank basically.

Do note that i am going to be use that car for a long term usage (7 to 10 years) before changing into a new car, i am not the type of person who changes car every 4 to 5 years.

So what do you guys think?, should I follow friend A suggestion or friend B suggestion.

TLDR: Buying first car, should i pay high DP and shorter loan, or just use the 9 years loan and pay 10% DP, invest the remaining cash.

 

[gabrielod]

@astrocol Both have their merits in different context. Essentially, you should think about returns in every year. Because (most) car loans use fixed rate, you have to first convert the fixed rate into effective interest rate (use this calculator).

First of all, the effective interest rate is independent of the loan amount. For instance,

For 5 years at 3.1% fixed rate yields 5.67% 5.82% effective interest rate.

For 9 years at 2.9% fixed rate yields 5.33% effective interest rate.

(Note that for 9 years I'm using a lower 2.9% because banks would lure you into a longer loan)

For example, a car costs RM 120k at present value. You are considering:

option A: down payment RM 20k, loan RM 100k

option B: down payment RM 70k, loan RM 50k

If you choose option A, that means you save RM 50k, let's say you invest RM 50k into ASB for 5 years (or 9 years). Ideally, in order for option A to be useful, your ASB should consistently return (roughly - to simplify the maths a little) more than RM 100k * 0.0567 0.0582 for 5 years (or 0.0533 for 9 years). Obviously, unless ASB returns significantly high return, which I highly doubt because ASB is benchmarked against FD, surely you won't beat the effective interest rate.

But the context matters:

1. What about if the car costs only RM 35k and you pay RM 20k as downpayment?
2. What if you manage to get higher returns etc with the capital that you save?
3. What if you could save tax as a company boss, buying the car for business?
4. What about car value depreciation (in some rare cases, appreciation)?

Do you see the point? The most objective method is to project your annualised return, and compute your future values (read about time value of money).

To conclude, for car loans:

• your loan amount matters
• your interest rate matters
• your unforseen (and unpredictable) investment return rate matters
• your loan duration impacts your financial risk

Edit: logic

 

[gladysbrierley]

@astrocol This question been asked and debated many times, some lean on A, some will lean more on B. It's up to your preference.

I'll be the contrarian & just say; if you're not financial savvy, don't think about this stuff too much, can always just do both. Take shorter hire purchase loan (5yr-7yr) with at least 20-30% DP, AND set aside a portion of your monthly income into ASB.

You'll get shorter car loan with lower overall interest incurred, and still able to invest in ASB, just the caveat you maybe get a little lesser profit since you're not dumping RM40k-RM50k initial capital on the get go.

 

[jimmyk]

@astrocol If you going to use it for 9 years then choose 9 years loan

 

[paperthinhymn]

@astrocol If it's myvi, do 9 years

 

[loves2preach]

@astrocol Take option A. The money in ASB can be your emergency savings too. It's always good to have some liquid cash with you.

Also please take city over yaris. City have higher resell value and less problem

 

[micha]

@astrocol Rule of thumb - if you have to take a loan, you can't afford it.

Unfortunately sometimes you have to take the loan because it's not really feasible to live and work where you are without a car. That's not your fault, nor do you really have a choice.

You DO have a choice what car you want to buy. Seriously consider whether the brand and model you mentioned is necessary or affordable for you. In my opinion it's affordable IF you can pay cash. This doesn't mean you should pay cash (loans can be useful at the right rate and duration), but if you are not actually able ro come up with the cash right now for this car, then i advise taking something cheaper. In the same size/class, the default is myvi obviously. Automatically save a tonne on interest and/or down payment.

If the car IS affordable then the calculations come in for what duration of loan is good. Don't listen to advise on early settlement, if you're planning to do that just don't take a loan of that long duration. EIR calculations are important, and you'll find that whatever rate is definitely not gonna beat your safe investments with exception of perhaps EPF (or ASB if you're bumi). So if you're gonna be sticking the savings from the loan into a safe investment, don't bother, reduce down payment as much as possible. Some are very confident of getting 10% from investments, if you're that sort then definitely take as much loan as you can.

 

[pandafan]

@micha This is terrible advice lmao. Even if I do have the money I’ll still take a loan.

 

[micha]

@pandafan I guess if you like donating money to banks, sure.

 

[eeevie]

@micha I agree with your approach, not sure why the downvotes

 

[micha]

@eeevie Eh, doesn't really matter, personal finance is not a popularity contest. I know the vast majority of Malaysians HAVE to take car loans, and being able to pay fully for the car is a privilege (esp for the first car). Also somehow the car is a status symbol, T/H > P1/P2 etc. Still a poor financial decision, nonetheless.

 

[eeevie]

@micha Driving my myvi around without needing to worry about car loans or minor scratches too much is the real privilege IMO