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Agensi Kaunseling dan Pengurusan Kredit (AKPK) Level 8, Maju Junction Mall 1001, Jalan Sultan Ismail 50250 Kuala Lumpur Fax: 03-2616 7601 E-mail: enquiry@akpk.org.my AKPK Second Edition 2013 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. AKPK disclaims all and any liability to any person using the information in this book as a basis for making any financial decision 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. Book 1.indb 2 3/25/11 11:40:53 AM
ep ro du ce d R N ot To Be CHAPTER Book 1.indb 59 4 BUYING A CAR 3/25/11 11:41:32 AM
ep ro du ce d 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 instalments. 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. NEW VERSUS USED CAR Be R 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. N ot To 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 Refer to Appendix 2.1 for advantages and disadvantages of owning a new car versus a used one 60 Book 1.indb 60 3/25/11 11:41:33 AM
TIPS ON BUYING A CAR 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 instalment and related running costs such as petrol, 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 loan with a 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 favour 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 61 Book 1.indb 61 3/25/11 11:41:33 AM
HOW DO I FINANCE MY CAR? ep ro du ce d 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. Hire purchase is the hiring of goods with the option to buy the goods at the end of the hire purchase term N ot To Be R If you take on a HP loan, you become the hirer while the lender is the owner. As the hirer, you will have to pay instalments to the lender based on an agreed duration while using the car. When all instalments are paid up, the ownership of the car is transferred to you. 62 Book 1.indb 62 3/25/11 11:41:34 AM
HOW MUCH CAN I AFFORD? The 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% p.a. Term charges are calculated on the principal amount financed over the entire hire purchase tenure. Let us see an example of how this is applied. Car price = RM50,000 Down payment @ 10% = RM5,000 HP loan amount HP rate (flat rate) = RM45,000 = 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 instalment = RM56,250 60 months = RM938 Refer to Hire Purchase Comparison Table in Appendix 2.2 63 Book 1.indb 63 3/25/11 11:41:36 AM
ep ro du ce d Here the car instalment is RM938 per month. To gauge if you can afford the instalment, 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 loan repayments. To Be R If you have other loans, your total monthly loan repayments should not exceed 40% of your net monthly income. Net monthly income N ot = Monthly car instalment 40% = RM938 40% = RM2,345 64 Book 1.indb 64 3/25/11 11:41:37 AM
With a salary of RM2,345 and no other loan commitments, you should be able to afford the instalment. You then need to also consider the associated expenses illustrated below: Fixed cost RM/ Month Notes 1 Instalment 938 RM45,000 @ 5% for 5 years 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 3 Parking, Toll, etc Sub-total 425 TOTAL 1,496 100 Based on estimate 100 Based on estimate The above has not taken into account depreciation and major repairs. Therefore, the monthly cost of owning the car is much more than the instalment of RM938. 65 Book 1.indb 65 3/25/11 11:41:37 AM
HOW MUCH AM I BEING ACTUALLY CHARGED? HP 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. Should you want to change your car and took on a HP loan with a longer tenure, you may find that the loan outstanding is more than the value of the car. If you cannot afford the instalments, put a larger down payment or buy a less expensive car. EARLY SETTLEMENT Early 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 lender check the market value of your car to see that it is of fair value at www.carprices.com.my be prepared to settle the difference, if any, before you proceed with the sale/transfer 66 Book 1.indb 66 3/25/11 11:41:37 AM
A sale that was not meant to be Age : 33 years old Occupation : Factory Operator Marital Status : Married Salleh obtained a 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 instalment for this 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 instalments. Eventually, he found that he could no longer keep up with repayment of the car instalments 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 instalments. 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 lender for default payments on his HP loan. Puzzled at the notices from the lender, 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 lender. Salleh was worried and went to the lender to inform them that he had already sold his car to Ahmad. The lender s staff 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 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. 67 Book 1.indb 67 3/25/11 11:41:37 AM
Warning: It is illegal to transfer/sell/part possession of the motor vehicle without the permission of your lender, who is the legal owner. You should not allow another party to continue your repayment with the lender. If you are unable to pay and have a buyer, get the consent of your lender to sell the motor vehicle and arrange for the proceeds of the sale to be paid directly to the lender to settle your outstanding balance. WHAT ELSE TO LOOK OUT FOR? Late payment charges The Hire Purchase Act 1967 stipulates that late payment charges on overdue instalments should not be more than 8% p.a., calculated on a daily basis. Therefore, it is wise to pay your instalments before the due date to avoid these late charges and repossession of your car. Repossession clause The lender can repossess the vehicle when the hirer defaults in two successive monthly instalments. Nevertheless, when the hirer has repaid more than 75% of the loan amount, the lender can only repossess the vehicle if it has obtained an order of the court to that effect. In the case where the hirer is deceased, the lender can repossess the vehicle if there are defaults in four successive monthly instalments. Refer to Appendix 2.3 to understand the repossession process and know what you can do if you are caught in that situation. 68 Book 1.indb 68 3/25/11 11:41:37 AM
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 instalments Make sure you can keep up with your car instalments to 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 lender before transferring the car to the new buyer 69 Book 1.indb 69 3/25/11 11:41:38 AM
Checklist Do you need a car? Can you take 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? 70 Book 1.indb 70 3/25/11 11:41:39 AM
SELF ASSESSMENT 1. Before buying a car, it is important for you to a. shop around for the best HP loan package b. understand that you are only a HIRER until the loan is fully settled and the lender may repossess your car if you fail to pay your instalments c. work out your commitments in relation to monthly instalments, 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. lender s b. insurance company s c. car dealer s d. agent s 3. When you take up a car loan, you should a. accept any unsigned agreement b. neglect the fine print in your loan agreement c. sign incomplete or blank forms d. know your rights under the Hire Purchase Act 1967 and other applicable laws 4. One of the following is NOT a feature of a HP: a. Interest is normally calculated on a flat rate basis b. The lender can repossess the car if you default your instalments c. You may transfer the ownership to a third party before you settle the loan d. None of the above 71 Book 1.indb 71 3/25/11 11:41:39 AM
5. If you fail to make your monthly HP instalments for two months consecutively, the lender may a. ask you to pay less interest b. ignore you c. repossess the vehicle d. 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 history b. High maintenance costs c. Higher loan margin d. Cheaper interest rates 7. The following statements are TRUE about the car repossession process EXCEPT: a. A pre-repossession notice (Fourth Schedule) is issued, allowing 21 days for the borrower to pay the outstanding arrears in full, or to return the motor vehicle to the lender and pay off any outstanding debt. b. A second notice will be issued after 14 days of the issuance of the Fourth Schedule. c. Storage and repossession charges are to be borne by the lender d. Borrowers course of action in responding to the repossession action by the lenders are spelt out in the Fifth Schedule Check your answers at the end of this book 72 Book 1.indb 72 3/25/11 11:41:39 AM