What is the ideal car loan tenure?
Many people rushed into the decision to buy a car. The excitement and anticipation from all the wait to get past the legal age to get a driver license or thinking that enough has been saved up are definitely leading to a quick and hasty decision of buying a car when you may not be ready yet, financially.
Take a loan, they said. Anyone can afford a car, they said. Just get a longer loan term if you can’t afford expensive monthly repayments, they said. However, is it wise to just get a prolonged loan term just because you are super eager to get a new car? What exactly is the ideal car loan tenure? Let’s take a look at what to consider!
Interest rates
Do you know that interest is calculated based on the principle sum instead of the residual balance of a car loan? To put things into perspective, consider this example: When you take a 9-year loan of RM100,000 at 2.5% interest rate, you would be paying RM22,500 in interest alone in total over the course of the loan term. On the other hand, you would only need to pay RM12,500 for a 5-year loan of RM100,000 at 2.5% interest rate!
As a general rule of thumb, if you need to take a 9-year car loan, you are not ready to buy a car. Ideally, you should cap your car loan tenure to no more than 5 years.
Car loan principal amount
Are you planning to get a cheap car just to get going or a costly but flashy new car? The principle amount of the car loan makes a difference when deciding what loan term to go for. While it is always true that short loan terms will fetch lower interest costs, it may not be worth-while if you need the cash flow for other investments.
However, do keep in mind that the pros of getting a longer car loan tenure is more likely to outweigh its cons when the principle of the car loan is low!
Plans to purchase properties
Are you planning to get a property of your own any time soon? If you have such plans, then the decision to get either a 5-year or 9-year loan will have a significant impact on your loan eligibility for your property purchase! Banks generally limit their lending up to 70% of any given borrower’s monthly income. Monthly commitments and instalments such as debt repayments on mortgages, car loans, outstanding credit card debts, personal loans and PTPTN will be added up to be compared against your monthly income to calculate your debt-servicing ratio.
So before you decide which loan term to go for, work out the maximum amount of monthly repayments you can afford for both car and property if you want or need to make both purchases soon.
In a nutshell, it differs for different individuals, depending on circumstances. Do you really need a new car now? Does the freed up cash flow used for some other investments make more returns while getting a longer car loan tenure? Do you have plans to buy a new house in the near future? So work out your plans and numbers before concluding on the car loan tenure!