Is a Car Loan and Hire Purchase the Same Thing?
Not entirely. A straight up car loan is when you borrow money from a bank which you then use to buy a car. The bank will determine the interest rate from the kind of car you want (more on that later). Also, the loan is unsecured, requiring no collateral from the borrower. The car belongs to you as soon as you purchase it, but you still owe it to the bank to repay the loan with interest. However most banks offer hire purchase instead of car loans which provides them with better financial security.
What is a Hire Purchase?
In the case of a hire purchase agreement, what you're doing is leasing the car monthly. The car is not yours until the last payment is made. Only once that happens does the full ownership of the car transfer to you. This means the bank can repossess the car if you can't meet your loan repayment obligations. It also means that you can't sell off your car before it's fully paid off without some complications since it technically still belongs to the bank. As with home loans, borrowers are also expected to provide a downpayment. Which are typically 10% for new cars and 20% for secondhand vehicles.
What Are The Different Kinds of Car Loans / Hire Purchase?
For the sake of simplicity most banks use the term hire purchase and car loans interchangeably.
There are generally three kinds:
New Car Loans
The word “new” in there refers to the car, not the loan. Loans for new cars are often easy to get approval for if you have a good credit history. Interest rates are quite competitive with an average range of 3% per annum. However, when you shop around, you're unlikely to come across banks that will disclose the general rates of interest for their car loans. This is because car loan interest rates vary depending on the type of car and the deals the bank has made with manufacturers.
Used Car Loans
Many banks offer a different set of loans for secondhand cars as well. It may be under “reconditioned vehicles”, or “used vehicles” or their regular car loan details include the age of the car. You can get a good loan for secondhand cars depending on the condition, supply, and popularity of the model. Speaking of condition, you don't need to worry too much about that since PUSPAKOM guidelines require vehicles to undergo a Hire Purchase Inspection which ensure that the car is in top working order before you get your hands on the wheel.
My First Car Loans
If you want a new car, but you're not keen on driving a secondhand vehicle, you can opt for a “My First Car” loan offered by some banks. It might also go under the name of “graduate car loan” or other names that suggest the loan is meant for those about to graduate or just entering the working world. These kinds of loans offer up to 100% of the car's market price with lower requirements for eligibility. The only trade-off is that it'll more than likely be one of the more practical cars rather than anything sexy. But hey, not a bad deal at all for your first car out of college.
How Do I Apply?
More often than not, you don't. Car companies and used car dealers will usually offer to handle the negotiating of finance deals for you. If you go through this route, as most people do, all that's required of you is to fill in the requisite forms, choose the tenure of the loan and submit these to the car agent together with proof of income.
The bank will get back to you with an offer letter indicating the terms of the loan including the rates and repayment schedule. If you're keen to look for your own loan, take down the make and model of the car you want, then call up the banks of your choice. They will inform you of the prevailing interest rates based on this information and you can negotiate from there.
Don't forget to include the year of manufacture of your vehicle too. This is important because the age of a vehicle can heavily affect the interest rate applied.
Cool. Any Other Things I Need to Know About Car Loans?
With car loans, you have to also pay for insurance and road tax, as required by law. You must remember to include this expense so you don't get surprised by how much you actually need to borrow and have for a down payment.
Insurance payments are higher than road tax payments in general, and the bank giving you the car loan will often arrange insurance for you with their selected partners. So if you prefer to find one on your own, do ask them in advance if that's feasible.
When looking for the best car loans and hire purchases banks have to offer, you can check out our car loan comparison tool right here on RinggitPlus. Have any other questions about car loans or see anything we missed out on? Let us know in the comments sections down below!