Published by:

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Agensi Kaunseling dan Pengurusan KreditAras 8, Maju Junction Mall1001, Jalan Sultan Ismail50250 Kuala LumpurFax : 03-2616 7601 E-mail: enquiry@akpk.org.my

© AKPKFirst Edition 2011

The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.

ISBN 978-983-44004-2-2

Disclaimer:

The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor.

Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action.

While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission.

The names and details of individuals in the real life cases have been changed to protect their identities.

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Chapter

4BUying a CaR

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After you start working, one of your major purchasing decisions could be buying a car. A car is a convenient means of transportation. However, there is more to owning a car than just paying the monthly installments. A car comes with other incidental expenses such as petrol, toll, parking, road tax, insurance, regular maintenance and at times, repair costs.

If you can pay the above expenses comfortably, then ask yourself whether a car to you is a need or a want.

When it becomes a need to buy a car, you have to decide whether to buy a new or used car. People often think that it is better to buy a new car due to its low maintenance costs. Although that may be true, a new car could also have drawbacks. Refer to Appendix 4.1 for advantages and disadvantages of owning a new car versus a used one

When deciding on the type of car that you need, first determine your affordability. If a new car is going to overstretch your financial resources, buy a used car which is in good condition. After all, a car simply gets you from point to point

nEW VERsUs UsED CaR

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• Shop around for a car that is reliable and meets your needs. Do some research and ask for advice from family and friends

• If you decide to buy a used car, get a trusted mechanic and PUSPAKOM to first inspect the car

• Consider the resale or trade-in value of the car, should you decide to sell it later

• If you decide to apply for a loan, shop around for a package based on your affordability. Find out what is the effective interest rate you will be paying

• Work out the budget based on your monthly income. Take into account the monthly installments and related running costs such as fuel, toll, parking fees, other expenses like road tax, insurance and regular servicing

• Try saving more cash for the down payment and apply for a smaller and shorter loan tenure. The longer the loan tenure, the more interest you pay. In addition, applying for a longer loan tenure may not work in your favor should you decide to sell your car as the value of your car may be lesser than the outstanding loan amount

• Do not use your credit card to pay for the down payment as doing so would mean getting yourself into a loan with high interest rates

• Be prepared for unexpected expenses to cover repairs in case of a breakdown or an accident. It is advisable to know the availability of spare parts and the costs to replace them

• Ensure that your car is adequately insured. There are two main types of motor insurance: comprehensive and third-party coverage

tiPs On BUying a CaR

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hOW DO i FinanCE My CaR?In most cases, people would look for a loan to finance the purchase of a car. This loan is more commonly known as a hire purchase or HP loan.

If you take on a HP loan, you become the hirer while the financier is the owner. As the hirer, you will have to pay installments to the financier based on an agreed duration while using the car. When all installments are paid up, the ownership of the car is transferred to you.

Hire purchase is the hiring of goods with the option to buy the goods at the end of the hire purchase term

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hOW MUCh Can i aFFORD?Interest rate on a car loan is normally computed on a flat rate basis. Under the Hire Purchase Act 1967, the term charges or interest rate should not exceed 10% per annum. Term charges are calculated on principal amount financed over the entire hire purchase tenure.

Let us see an example of how this is applied.

Car price = RM50,000Down payment @ 10% = RM5,000HP loan amount = RM45,000HP rate (flat rate) = 5% p.a.Loan tenure = 5 years (60 months)

Computation:

Total interest charged

= Loan amount x Rate x Years = RM45,000 x 5% x 5 = RM11,250

Total loan + Interest

= RM45,000 + RM11,250 = RM56,250

Monthly installment

= RM56,250 ÷ 60 months = RM938

For comparison purposes, refer to different scenarios of financing in Appendix 4.2

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Gross monthly income

= Monthly car installment ÷ 40%

= RM938 ÷ 40%

= RM2,345

Here the car installment is RM938 per month. To gauge if you can afford the installment, use this formula to derive the minimum monthly income you will need. This minimum monthly income computation assumes that you do not have any other installments.

If you have other loans, your total monthly loan repayments should not exceed 40% of your gross monthly income.

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With a salary of RM2,345 and no other loan commitments, you should be able to afford the installments. You then need to also consider the associated expenses illustrated below.

The above has not taken into account the depreciation and major repairs.

Therefore the monthly cost of owning the car is much more than the installment of RM938.

RM/Fixed cost Month notes

1 Installment 938 RM45K @ 5% for 5 years (rounded)

2 Insurance 125 RM1,500 p.a /12 months

3 Road Tax 8 RM90 p.a /12 months

sub - total 1,071

Variable cost

1 Petrol 225 Assuming RM0.15/km x 50km/day x 30 days

2 Service & Maintenance 100 Based on estimate

3 Parking/ Toll etc 100 Based on estimate

sub - total 425

tOtaL 1,496

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hOW MUCh aM i BEing aCtUaLLy ChaRgED?Hire purchase loans are generally quoted on a flat rate basis, which makes it more expensive than it really is. Take for example, the earlier case where the hire purchase interest rate is 5% p.a. but the effective rate works out to 9.55% p.a.!

This happens because interest is charged upfront on the principal loan amount (RM45,000) over the entire loan period (5 years). A flat rate calculation does not consider the monthly repayments as reducing the principal amount.

Thus it is advisable to keep the tenure to not more than 5 years. If you take a longer tenure and when you want to change your car, you may find that the loan outstanding is more than the value of the car. If you cannot afford the installments, put a larger down payment or buy a less expensive car.

EaRLy sEttLEMEntEarly settlement of the loan will entitle you to a rebate on the interest. This is calculated using the ‘Rule of 78’ formula where the bulk of the interest is charged in the initial years of the loan. However, there could be a fee or penalty charged (as stated in the loan agreement) if the loan is repaid early.

If you decide to sell your car during the existing tenure of the HP, you need to:

• check your redemption or outstanding amount with your financier

• check the market value of your car to see that it is of fair value

• be prepared to settle the difference, if any, before you proceed with the sale/transfer

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a sale that was not to beAge : 33 years oldOccupation : Factory OperatorMarital Status : Married

Salleh obtained a hire purchase (HP) facility to buy a car worth RM60,000. With his basic pay, coupled with his substantive overtime income, Salleh had no problem servicing the monthly installment for his car.

Unfortunately, soon after buying the vehicle Salleh was retrenched as the company he worked for had downsized its operations. Salleh was unemployed for almost a year and had to use his savings to put food on the table and service his car installments. Eventually, he found that he could no longer keep up with repayment of the car installments and decided to sell his car.

Salleh informed his friend Ahmad that he wanted to sell his car as he could no longer afford servicing the HP loan. Ahmad offered to ‘buy’ the car by taking over the monthly payments of Salleh’s HP loan installments. The outstanding balance of the HP loan then stood at RM40,000. On top of that Ahmad offered to give Salleh RM1,000 in cash. Salleh immediately agreed to the proposal and handed the keys to Ahmad.

However, about a year later, Salleh started receiving reminder letters from the bank for default payments on his HP loan. Puzzled at the notices from the bank, Salleh tried to contact Ahmad to get to the bottom of things. Unfortunately his friend and the car were nowhere in sight. The outstanding HP loan now amounted to over RM30,000. As the default continued, Salleh was served with a bankruptcy notice by the bank.

Salleh was worried and went to the bank to inform them he had already ‘sold’ his car to Ahmad. An officer at the bank told Salleh that it was wrong for him to ‘sell’ the car to a third party prior to settling his existing HP loan. Salleh was alarmed with the bank officer’s remark, and was even more shocked when he found out that he was still liable for the outstanding HP loan. Salleh was at a loss at how he could resolve his financial predicament. To avoid bankruptcy he had to seek the assistance of AKPK.

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What ELsE tO LOOK OUt FOR?Late payment charges

The Hire Purchase Act stipulates that late payment charges on overdue installments should not be more than 8% p.a. calculated on a daily basis. Therefore it is wise to pay your installments before the due dates to avoid these late charges and repossession of your car.

Repossession clause

The financier can repossess the car under the following circumstances:

• when the hirer defaults in 2 successive monthly installments or the final installment; or

• in the case where the hirer is deceased, defaults in 4 successive monthly installments

The hirer needs to pay the repossession and storage charges in addition to the overdue installments and late payment charges to reclaim the car.

Refer to Appendix 4.3 to understand the repossession process and know what you can do if you are caught in that situation.

When you sell your car during the existing HP term, ensure the outstanding loan is fully settled with your financier before you transfer the ownership. You will be liable for any unpaid installments as long as the HP loan is still under your name

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takeaways• If you need to buy a car, take a loan amount

you can afford to repay comfortably

• Owning a car costs much more than just its monthly installments

• Make sure you can keep up with your car installments and avoid late payment penalties or worse, repossession of your vehicle

• To get maximum value for your car purchase, it may be wise to go for a smaller loan, with a shorter tenure

• If you sell your car, ensure all outstanding loans are settled with the financier before transferring the car to the new buyer

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Checklist

Do you need a car? Can you do with public transportation instead?

If you have a car, can you list down your monthly/yearly costs to maintain it?

Do you know the effective rate charged on your HP loan?

Do you know the current value of your car?

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sELF assEssMEnt

1. Before buying a car, it is important for you to _________

a. shop around for the best Hire Purchase (HP) loan package

b. understand that you are only a HIRER until the loan is fully settled and the bank may repossess your car if you fail to pay your installments

c. work out your commitments in relation to monthly installments, petrol, parking, road tax and maintenance

d. all of the above

2. Under the Hire Purchase Act 1967 you are not allowed to sell or transfer the ownership of the vehicle to a third party without getting your _______ approval.

a. financier’sb. insurance company’sc. car dealer’sd. agent’s

3. When you take up a car loan, you should __________

a. accept any unsigned agreementb. neglect the fine print in your loan agreementc. sign incomplete or blank formsd. know your rights under the Hire Purchase Act and other

applicable laws

4. One of the following is NOT a feature of a hire purchase:

a. Interest rates are normally on a flat rate basisb. The bank can repossess the car if you default your

installments c. You may transfer the ownership to a third party before

you settle the loand. None of the above

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5. If you fail to make your monthly hire purchase installments for two months consecutively, the bank may __________

a. ask you to pay less interestb. ignore youc. repossess the vehicled. get a loan shark to deal with you

6. The following are the advantages of buying a new car over a used car, EXCEPT:

a. No worries about past historyb. High maintenance costsc. Higher loan margind. Cheaper interest rates

7. The following statements are TRUE about car repossession process EXCEPT:

a. A pre-repossession notice (Fourth Schedule) giving 21 days for full settlement has to be served on the borrower by the bank

b. After the Fourth Schedule, a second notice giving a further 14 days to settle the outstanding is served on the borrower

c. Storage and repossession charges are to be borne by the bank

d. Borrowers’ course of action in responding to the repossession action by the banks are spelt out in the Fifth Schedule

Check your answers at the end of this book

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