“What car should I buy?” is one of those perennial questions every young adult faces. In 10 years, you ask your self again, what car should I buy, now?
And on and on, the cycle goes as your salary (hopefully) increases and your obligations increase too (wife, kids, etc.)
One way to tackle this problem is to understand how much you can actually afford, and that’s where our advice comes in.
These aren’t just off the back of a cereal box mind you, these are tried and tested guidelines that should help you spend wisely and narrow down your search to realistic brands.
Tip #1: Don’t spend on a car that cost more than your annual gross salary
If you earn RM3,000 as a fresh grad, you can afford a car that costs RM3,000 x 12 months = RM36,000. The logic here is that, if you can reasonably pay it off within a year, you can divide that cost into 20% increments over 5 years.
So 20% is RM600 over 60 payments, or 5 years. Why 5? Well, that’s the medium length of a car loan with the most reasonable amount of interest.
Let’s face it: Most people will buy a car with a bank loan, and the longer you lend, the more interest you’ll pay. Shorter loan, lesser interest paid overall.
Tip #2: Don’t spend more than 20% of your take-home salary
As we’ve mentioned earlier, 20% is the sweet spot for loan repayments. Generally, banks will lend up to 30% of your annual gross income for a home loan. So as you move up from a fresh grad and begin to think about buying a home, you don’t want you car to anchor you down.
In Malaysia, sites have adopted the arbitrary 20/7/20 rule, 20% deposit, 7 year loan, and 20% of your monthly nett salary for repayments.
We outright disagree with this rule, and think it should be a leaner 10/5/20 rule—it’s less sexy but makes more sense.
Pay 10% deposit, you don’t want to sink cash into a depreciating asset simply to lower the monthly repayment. That means you can’t afford it in the first place.
Loans in Malaysia are flat rate, meaning they do not change over time. Take advantage of this fact and get used to the consistent repayments. Adding in more capital in the deposit will lower your monthly commitments, but that’s capital that’s just wasted.
Put that cash in your EPF or ASB, which yields 5% yearly. Your car loan usually comes in anywhere from 2.5% to 4.5%, after which, you’d better not take that loan. Either way, you’ll be making more money by saving on the deposit, rather than reducing your monthly repayments which will be added back in with the interest anyway.
Yes, you can’t immediately see the return on your EPF in 5 years, but with compounding interest, your 55-year-old self will thank you.
Tip #3: Remember the hidden costs
Four sets of tyres can cost over RM1,000; insurance can cost anywhere from RM500 to thousands yearly, maintenance fees come every 3 months for a new car, and then there’s the cost of petrol, which can also cost anywhere from RM200 to RM500 a month.
You may be frugal and skimp on tyres or maintenance, but you’re only increasing the risk of an accident which will balloon costs.
With these tips in mind, make good decisions about what car you should buy.
