In 1949, the loan tenure for a VW Beetle was 12 months with an interest rate of 9 % per annum. Things have changed. In Malaysia today, car loan tenures are usually of 5,7, or even 9 years with interest rates hovering around 3% per annum (calculated on principal). Cars are getting more expensive and are almost impossible to purchase without using a loan.
But is taking a car loan a bad financial decision? Well, it depends on your financial circumstances (mainly your income), how much you benefit from the car, and how much you enjoy the car.
Whether or not you are able to afford the car of your dreams (or needs) will depend on several factors.
1. Debt Service Ratio
The main concern about car loans is the monthly instalment. If you’ve been reading our articles on the minimum salary required to purchase certain cars (eg. Nissan Almera, Honda City), a common guideline is to not exceed 20% of your salary.
Whether or not a bank will approve your car loan depends on their Debt Service Ratio (DSR).
DSR = (total monthly commitments) / (net income)
Different banks have different DSR limits, so if one bank rejects your application, you can always try a different one. Some have a limit of 40% while some 70%.
Keep in mind that total monthly commitments are inclusive of mortgages and student loans, so be realistic with the monthly instalment that you can afford.
If you have more cash in hand and wish to lower the monthly instalment (to enable application of other loans), you can put more in down payment and finance a smaller portion.
2. CCRIS and CTOS
CCRIS (Central Credit Reference Information System) and CTOS (Credit Tip-Off Service) do pretty much the same thing. They both report your loan repayment behaviour. (Do you pay off your debts or not?).
CCRIS is a system by Bank Negara Malaysia, while CTOS is a private company.
When applying for a new car loan, they will have a look at your debt repayment record. If you have a bad repayment record, your loan will not be approved.
To have good CCRIS or CTOS records, just pay your debt on time.
3. Job type/Income volatility
The chances of loan approvals are highest for those who work government jobs. Banks want to make sure you can give their money back. Hence, the more stable your job is, the easier it is to get your loan approved.
With that said, freelancers and commission-based employees have it the hardest when applying for loans. Lenders will want to see proof of a stable income so you can either present your average income over 6 months (bank statement) or your income tax declaration.
On a side note, if you work for some big companies, they might even pay off the interest portion of your car loan as part of the employee benefits.
4. Value of the Car
Besides the financial credibility of yourself, the value of the car also plays a big role in the loan approval. This is not a problem for brand-new cars, but becomes an issue when you try to finance a used car.
It matters because if you default on your loan, the car serves as a collateral. The value of the car must be able to pay off the loan balance, provided you are unable to pay.
If the bank values the car less than you expect, you can try putting in more down payment (less financing) or just look for a different bank.
5. Economic Situation
In bad economies, banks will be more cautious with who they lend their money to. Loan approvals may take longer in bad economies since banks will do a more thorough background check on the borrower. In good economies, it is easier to get your loan approved.
Of course, this is something beyond your control, but if you have a good track record of paying your loans and have a good and stable income, it should be no problem getting your loan approved in good or bad economies.
So, there you have it. Those are the 5 things that will determine if your loan is approved or not. Loans are a good tool and should be used wisely. Good luck with your next car purchase and make sure you get maximum satisfaction out of it.