One of the most popular loan products in Malaysia is the car loan – helping people realise their dreams of independent 4-wheeled transportation since when they were launched.
Buying a car in Malaysia isn’t the cheapest thing to do – and with jobs and salaries being what they are today, any financial help is welcome. Banks and lenders have designed specific loan products to help you buy a car and not take so much of a financial hit.
What is a Car Loan?
Car Loan is a financing facility provided by banks and financial institutions to individuals who need a financial help to purchase a car. A car loan is also known as a hire purchase. A hire purchase facility provides funding to individuals for car purchase and the ownership gets transferred to the individual once he/she makes the full repayment back to the bank or the institutions.
Part-financing, flexible EMI options, affordable rates of interest, and good loan terms are making these car loan products way too tempting for first time car buyers, but there are pitfalls and places where you could mess up, so here’s a guide to taking and using a car loan in Malaysia.
- Make sure it’s not a Hire Purchase agreement
- A better credit rating means more favourable interest rates
- Loan Term
- Consider Depreciation
- Consider Gap Insurance
There’s a difference between car loans and hire purchase agreements. A car loan, once used, transfers the ownership of the vehicle onto your name and once the EMIs are all paid off, nullifies the part of the contract that says the car can be repossessed. If you default on any EMI payment, the bank will at most apply a penalty charge and you’ll have to pay a bit more. If you run into financial difficulties with a car loan, you can sell the car and transfer the loan paying obligation onto someone else, or make an arrangement to that effect.
Under a hire purchase agreement, however, you will effectively only hire (or rent) the car out for the period in which you finish making payments. After all the payments have been made, the car gets registered onto your name. The drawback here is that if you even miss one payment – the car can be repossessed by the seller (you don’t just get away by paying a little extra penalty or interest amount). You can’t even sell the car and transfer the liability, as the car is not registered on your name.
Experian and Equifax are the two most well recognised and widely used credit rating agencies in Malaysia – and a good credit rating on either one of these platforms means that you will receive a lower and more affordable rate of interest – as the bank will have a sense of safety knowing that you can be trusted to repay your loan.
Request your credit rating history from either Equifax or Experian and see whether it’s going to get you a better rate of interest, and decide then on which car you wish to purchase. You might just be able to get a higher loan amount sanctioned on better terms with a good rating, so you can increase the budget that you’d planned and buy a bigger, better car.
You can choose to pay a higher amount regularly for a short period of time, or a smaller amount regularly for a longer period of time.
Car loan tenures are usually between 18 – 36 months. The shorter the tenure, the larger the monthly sum you’ll pay and vice versa – but remember that the overall total does not remain the same with different tenure option. You may end up paying a larger total amount in the case of longer tenures, but it will take the pressure off your monthly expenditure. If you don’t mind taking a hit every month for a shorter tenure, however, consider a shorter term option.
If you are the kind of person who gets bored of your car too quickly, and likes to keep upgrading – you’ll need to do a little more homework before taking a loan. Needless to say you’ll need a loan for a shorter term, but you’ll also need to consider the effect of depreciation on your vehicle. You won’t be able to sell it for nearly the same price as you purchased it, so consider the cost of the old car, the financing option you’ve chosen and the cost of the next car you wish to purchase – and the loan option for that car as well.
This is different from regular auto insurance that protects you in the event of a crash. This gap insurance pays you the difference between what you paid for the car when purchasing it, and the insurance amount that you receive in the event of a crash.
Constituents Of A Car Loan
There are the following four basic building blocks of a car loan:
- Financing Amount or Loan Amount: The most important thing a customer should keep in mind before opting to apply for a car loan/ auto finance is the amount of loan. The car loans provide customers with a margin of financing that directly depends upon the price of the car. Before deciding to apply for a car loan, a customer should see if the car loan he/she is choosing for fulfils his/her financing amount requirement.
- Interest Rate or Profit Rate: Once an individual finds the car loan that is the best fit in terms of financing amount, the next thing he/she should take in account is the interest or profit rate associated with the loan.
- Financing Tenure: An individual should also keep the financing tenure available with a car loan into account. Before choosing a car loan package, an individual needs to evaluate his/her financial standing and pick a package according to his/her repayment capacity.
- Terms and Conditions: An individual also should read the terms and conditions of a loan before opting for one. He/she also needs to understand fully about the requirements of the loan package and see if it’s the best suited for his/her needs.
Types Of Car Loans
Types Of Car Loans Based On The Principle Of Financing
Based on the principle of financing, there are two types of car loans available for customers:
- Conventional Car Loan: A conventional car loan provides an individual with funds to purchase a car. It covers all new, used and unregistered and reconditioned cars. The margin of financing with a conventional car loan is up to 90% of the vehicles price. A conventional loan comes with a flexible repayment tenure that can be extended to 9 years.
- Islamic Car Loan: Islamic car loans are based on Shariah principles of financing. The ownership of the car is transferred to the individual once the repayment is completed. The Islamic car loans come with a high margin of financing, i.e. up to 90% to 100% of the car’s price.
Types Of Car Loans Based On Car Type
Based on the type of car, there are 3 types of car loans available:
- New Car Loan: This loan scheme covers all new national and non-national cars. The margin of financing for a new car loan is respectively higher than other car loans.
- Used or Old Car Loan: This type of car loan covers used cars. Both national and non-national cars come under this category. The margin of financing with this car loan is relatively lesser than that of a new car loan. The margin of financing also depends upon the age of the car.
- Unregistered and Reconditioned Car: This type of car loan covers the unregistered and reconditioned cars as well as the imported cars. The financing margin with this car loan depends upon the age of the car.
Who Can Apply For A Car Loan
The eligibility criteria of a car loan are as follows:
- Individuals applying for a car loan must be at least 18 years old at the application date.
- Individuals must be Malaysian citizens.
- Any salary earning individuals, self-employed individuals, public listed companies, private limited companies, sole proprietorships, and partnerships can apply for a car loan.
- The car loans that are available for foreigners require them to be accompanied with a local guarantor.
Documents Required For A Car Loan
The set of documents required may vary from applicant to applicant. The following are the lists of documents required to be presented by the applicants:
For Salary Earning Individual Applicants:
- Copies of both sides of NRIC.
- One copy of driving license.
- Salary slips’ copies for the last 1-6 months (depending upon the loan package).
- Bank/passbook statement for the last 1-6 months.
- Latest EA form or EPF statement.
- Employment confirmation letter.
For Self-employed Individuals, Sole Proprietors, And Partners Of A Partnership:
- Copies of both pages of NRIC.
- One copy of driving license.
- Business registration certificate.
- Latest Borang/BE with the validated receipt of tax payment LHDN.
- Bank statement for the 3 to 6 latest months.
- A relevant business income proof document.
For Private Limited Companies:
- Latest form 9, 13, 24, and 49.
- Bank statements for the 3-6 recent months.
- Certified true copies of Articles of Association and Memorandum.
- Profile of the company’s director
- Management’s profile.
- A copy of the Certificate of Commencement of Business.
For Public Listed Companies:
- Latest audited annual financial statement.
- Latest form 24 and 49.
For Foreign Applicants:
- One copy of passport.
- One copy of contract letter, or
- One copy of employment letter.
For Purchase Of An Old/Used Car:
- One copy of seller’s NRIC and one copy of seller’s driving license if the seller is an individual.
- Performa invoice and registration card.
How To Apply For A Car Loan
- An individual can apply for a car loan by visiting the nearest branch of the bank or financial institution offering a car loan.
- The car loan application request can also be put to the bank via the bank’s/institution’s customer service numbers.
- Individuals can also apply for a car loan via the official website of a bank or institution offering a car loan.
Car Loan Fees & Charges
The following are the major fees and charges an applicant has to bear with a car loan:
|Monthly instalment||For fixed interest/profit rate: M = [P + (P x R x T)] / t Where M = Monthly instalment; P = Loan amount; R = Interest/profit rate; T = Loan tenure in years; t = Loan tenure in months.|
|For floating rate of profit/interest: Depends upon the loan amount, loan tenure, and the rate of interest/profit.|
|Late payment charges (for conventional car loan)||Up to 8% p.a. on the overdue monthly instalment amount.|
|Late payment charges (for Islamic car loan)||During the facility period: 1% p.a. of the overdue instalment amount.|
|After the facility’s maturity: Based on IIMM (Islamic Interbank Money Market) rate.|
|Stamp duty||As per the Stamp Duty Act 1949.|