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In this series, we want to provide you with helpful information to gain better financial literacy. Through this journey, you will learn how to manage your money better, save more and secure your finances for the future. If you often find yourself clueless on money matters like paying your first income tax, applying for loans or even how to save more without feeling miserable, this series is just for you.
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Whilst public transport is available in Malaysia, it is always more convenient if you have a car to get you around. Especially when you live outside Kuala Lumpur, you pretty much depend on a car to travel daily. Most young adults borrow cars from their parents, or some luckier ones get them as a gift; but as we grow, we have this want to own a car that is ours: chosen and test-driven by ourselves. For whatever reason, be it a personal milestone or confidence booster, there’s a sense of accomplishment when we have a car under our own name.
But there’s more to having a car than getting it for the sake of rewarding yourself; there are many other considerations which lead to one big question: are you able to afford a car?
To answer the question, here’s a simple formula to follow on: don’t pay more than 15% of your monthly salary.
For example, if you make a gross amount of RM3500 a month, according to the formula given, you shouldn’t be paying more than RM525 a month on it.
Let’s say you make RM3500, and you’re looking at buying a RM30,000 car.
So If you take a 5-year loan with interest of 3%, and say you put down a 10% downpayment for a RM30,000 car, you’d be paying roughly RM517.50 a month.
(Additionally, you can also use a car loan calculator to gauge your monthly payments)
Here’s a reminder though, most banks require a minimum of 10% downpayment, but sometimes there may be special 0% deals and you’ll be tempted to get a car there and then because ‘it’s such a great deal! And it’s only for a limited time!’, do not fall for this. This could lead to higher interest rates; with down payments, remember that the higher you pay, the lower your interest rate totals. So the longer you take to repay your loans, the higher the total interest rate you will need to pay, that’s why we are encouraged to pay it off the sooner the better.
Note that this formula only serves as a rough guide for an average young adult, you should also first take into consideration your other financial responsibilities that are more important, such as paying off your student loans, paying rent, etc.
On top of asking yourself if you can afford to pay RM517.50/month, don’t forget the expenses that come with owning a car such as your car insurance, the road tax, petrol, parking, and tolls. There’s also the routine maintenance such as servicing the engine, changing the tires, and replacing any parts that are not safe anymore, like the brakes and the windshield. As you own a car, you’re responsible for taking care of it, both for your safety and the safety of other drivers on the road.
What should you do before buying a car?
First, make a list of all your current expenses. Based on that, assess if you can afford to meet the monthly payments for your car loan, alongside the other costs of owning a car.
A good rule to follow is the 36% debt rule: all of your debts should not exceed 36% of your gross income.
So using the same example above, if you make a gross amount of RM3000, all of your debts should not exceed RM1080. As mentioned above, if you’re paying RM517.50/month for your car:
RM1080 – RM517.50 = RM562.50
If your other more important debt commitments exceed RM562.50, then you might want to reconsider getting a car at the moment. Unless a car is something you desperately and urgently need; we suggest you only get one after your debts are almost cleared, or look into getting a more affordable car.
Another additional factor to consider when buying a car is the depreciation rate. The moment you receive the key from the car dealer, depreciation has already happened! In general, after 5 years, the new car you bought would lose up to 60% of its value. Other circumstances that can speed up the depreciation rate are mileage, brand, history of reliability, degree of wear and tear, and modifications.
Lastly, ask yourself: is this car purchase a rational or an emotional decision? Buying a more expensive car as a status symbol when a cheaper car is enough to get you where you need to go is something you should be careful of – don’t let that push you into buying a car you can’t afford.
Or perhaps looking into purchasing a secondhand car could be an option to consider too! However, a more thorough and detailed research should be conducted prior to buying the car. If done right, it could bring more value than a new car and would be a more affordable option.
Let us all learn to make wiser financial decisions so that we can achieve financial freedom sooner, instead of making decisions on a whim that pushes us further into the debt trap