Buying a car is, without doubt, a big investment; for many Malaysians, it’s quite likely the second most expensive thing that we’ll buy after a house. But more than that, vehicle purchases are also frequently motivated by emotional factors – I’m sure you had a dream car that stays rent-free at the back of your mind!

There are other factors, too. Some people prefer a certain carmaker because of its perceived association with success and wealth, some for their perceived resale value, while others prefer electric vehicles (EVs) because of their personal beliefs. As a result, some people may end up purchasing a car that they cannot actually afford, which inevitably leads to financial distress.

So, how would you know whether you can actually afford the car that you’ve got your eyes on? As it turns out, there are some guidelines that can help you make an informed estimation. Let us get right down to them.

Guideline 1: Price of the car should be equivalent to your gross annual salary

This “rule” is fairly straightforward; essentially, you can afford vehicles priced at approximately your gross annual income (in other words, your gross monthly salary x 12 months). So for example, if you are earning RM5,000 per month, then you can afford to purchase a car that costs about RM60,000. Being a rough estimate, you can always be flexible with the figure.

Based on this guideline, here are some cars that you can afford based on your salary: 

Monthly salary	Annual salary	Cars that you can afford	Price
RM5,000	RM60,000	Perodua MyVi 1.5 AV (CVT) Perodua Alza 1.5 X (CVT) Proton Persona 1.6L Premium (CVT) Proton Iriz 1.6L Active CVT	RM61,900 RM64,474 RM58,300 RM57,300
RM7,000	RM84,000	Proton X50 1.5T Standard Honda City 1.5L E  Honda WR-V 1.5L S Toyota Vios 1.5E AT Nissan Almera 1.0L Turbo VL	RM86,300 RM85,600 RM89,900 RM89,600 RM83,888
RM10,000	RM120,000	Proton X70 1.5 TGDi Premium 2WD Proton X90 1.5 TGDi BSG Standard Toyota HR-V 1.5L S BYD Dolphin Premium Extended Range	RM123,800 RM123,800 RM115,900 RM125,530
RM17,000	RM204,000	Tesla Model Y Subaru Forester 2.0i-S EyeSight GT Honda Accord 1.5 TC-P Volkswagen Tiguan All-Space Elegance	RM199,999 RM197,788 RM197,400 RM195,590
RM20,000	RM240,000	Volkswagen Tiguan All-Space R-Line Mercedes Benz A 200 Progressive Line BMW X1 sDrive 20i M Sport	RM247,073 RM238,618 RM243,800

The simplicity and uncomplicated calculations of this rule is one reason why RinggitPlus co-founder and licensed financial planner, Hann Liew, thinks it’s a good guideline that Malaysians can rely on when deciding on whether they can afford the purchase of a car. “I love this rule – it’s pretty clear-cut and very easy to remember and calculate when you’re looking for a new car,” he said.

On the other hand, this simplicity means it does not take into consideration the cost of loan or financing, namely the interest/profit charged on the loan/financing that you take. So for example, if you were to purchase a car priced at RM60,000, and would like to take a loan of RM48,000 (5 years, at 3% p.a.), this means that your cost of loan will stand at RM7,200 (RM48,000 x 3% x 5 years). 

It’s also important to remember that the cost of loan will increase in tandem with the tenure of your loan; the longer your tenure, the higher the cost. To illustrate this, let’s reuse our example in the previous paragraph (car priced at RM60,000, with you taking a loan of RM48,000 at 3% p.a. interest rate). If you decide to opt for a seven-year loan or a nine-year loan, the cost of loan will come up to RM10,080 and RM12,960, respectively – even though the amount that you borrow is unchanged (RM48,000). 

As you can see from our example, the cost of the vehicle shoots up considerably when we take the cost of loan/financing into account. Naturally, there’s a second “rule” that helps you better calculate car affordability based on salary.

Guideline 2: Rule 20/7/20

Like the first guideline, Rule 20/7/20 is also a popular guideline, and takes slightly more effort to digest because it requires more calculations from your end. Essentially, the rule translates to the following:

• Put down a deposit of 20%
• Opt for a seven-year loan tenure at most (assuming 3% p.a. interest rate)
• Allocate no more than 20% of your net monthly salary for loan instalments

To illustrate how this rule works, let’s say you’re interested in purchasing a 2023 Perodua Myvi 1.5 Advance (CVT) priced approximately at RM61,900 (on-the-road). But can you afford it if you have a monthly salary of RM5,000 – which gives you a net salary of approximately RM4,305.00, after deducting your EPF, SOCSO, and EIS contributions?

Let’s find out by applying Rule 20/7/20.

Rule 20/7/20	Calculations
20% deposit	RM61,900 x 20% = RM12,380
Seven-year loan (3% p.a. interest rate)	RM61,900 – RM12,380 = RM49,520 Take a seven-year loan of RM49,520 from the bank (3% p.a. interest rate) Monthly instalment = RM713.32
20% of your net monthly salary (allocation for monthly instalment)	RM4,305 x 20% = RM861.00

From this calculation, you can clearly see that you are, in fact, able to comfortably afford the Perodua Myvi that you’ve been eyeing, given that the monthly instalment is RM713, whereas your allocated budget is RM861.

And if you’re interested, we’ve also done the math on the estimated monthly instalments for the list of cars that we’ve shared in the previous section – calculated based on Rule 20/7/20 – along with the net monthly salary that is required in order to afford the specified car: 

Gross monthly salary	20% of net monthly salary (approximate)	Car models	Car prices	Estimated monthly instalments
RM5,000	RM861	Perodua MyVi 1.5 AV (CVT) Perodua Alza 1.5 X (CVT) Proton Persona 1.6L Premium (CVT) Proton Iriz 1.6L Active CVT	RM61,900 RM64,474 RM58,300 RM57,300	RM713 RM742 RM671 RM660
RM7,000	RM1,174	Proton X50 1.5T Standard Honda City 1.5L E  Honda WR-V 1.5L S Toyota Vios 1.5E AT Nissan Almera 1.0L Turbo VL	RM86,300 RM85,600 RM89,900 RM89,600 RM83,888	RM994 RM986 RM1,035 RM1,032 RM966
RM10,000	RM1,587	Proton X70 1.5 TGDi Premium 2WD Proton X90 1.5 TGDi BSG Standard Toyota HR-V 1.5L S BYD Dolphin Premium Extended Range	RM123,800 RM123,800 RM115,900 RM125,530	RM1,426 RM1,426 RM1,335 RM1,446
RM17,000	RM2,483	Tesla Model Y Subaru Forester 2.0i-S EyeSight GT Honda Accord 1.5 TC-P Volkswagen Tiguan All-Space Elegance	RM199,000 RM197,788 RM197,400 RM195,590	RM2,293 RM2,279 RM2,274 RM2,253
RM20,000	RM2,867	Volkswagen Tiguan All-Space R-Line Mercedes Benz A 200 Progressive Line BMW X1 sDrive 20i M Sport	RM247,073 RM238,618 RM243,800	RM2,847 RM2,749 RM2,809

Commenting on this guideline, Hann admits that this second rule can seem pretty complicated to the average individual, but he highlighted that it can also be more useful compared to the first rule. “It doesn’t just calculate the cost of the car, but the cost of the car and the cost of the loan that you need to take out to purchase the car. It’ll also let you see how much you need to pay on a month-to-month basis, and as such, give you a more concrete and accurate sense as to whether you can really afford that particular car,” he said.

Hann also stressed that like any other “rules” in personal finance, there’s always some wiggle room if you wish to adapt Rule 20/7/20 slightly to meet your needs or preferences.

“Let’s say you find out that your dream car has a monthly instalment 25% of your net monthly income or you are a few thousand Ringgit short of the 20% downpayment, you can still make it work. Take a look at your monthly spending and commitments, and see if you can make some adjustments to accommodate the slight additional expense. But it’s really important that you are honest with yourself when you do this, because this is a medium term commitment,” said Hann.

Do the two guidelines complement each other?

Interestingly, the 20/7/20 Rule works well with the first guideline (price of your car = your gross annual salary), and is mathematically a continuation of it. To help you understand what we mean, let’s take a step back and do a little comparison.

Under Guideline 1, it’s said that your car price should not exceed your gross annual salary. So as per our example earlier, if your gross monthly salary stands at RM5,000, then you should do your best to purchase cars that are priced around RM60,000.

This is essentially confirmed in the calculations shown under Guideline 2 (Rule 20/7/20), where it’s shown that you’re able to comfortably afford a Perodua Myvi priced at RM61,900 (i.e. around RM60,000) if you’re earning a gross salary of RM5,000 per month. In fact, your allocated budget from your net monthly salary for car loan instalment (RM861) is even slightly higher than the estimated instalment amount (RM713) – which gives you an excess of about RM140. This excess can then be used for the one-off payments for your car, such as the car insurance and regular servicing.

Therefore, the next time you’re planning to buy a new vehicle, your thought process can be a lot smoother:

• Is the car’s price equal to or less than your annual salary?
• Do I have enough savings to pay for a 20% downpayment?
• Is the estimated monthly instalment less than 20% of my take home pay?

If the answer is “yes” to all the above, then you can indeed afford the car!

***

With this, we hope that you’ll have an easier time deciding whether you’re financially capable to purchase your dream car (like that Tesla Model Y that was just launched…). Ultimately, make sure to be honest with yourself because car purchases are medium-term commitments that can significantly impact your financial wellbeing for up to nine years (depending on the tenure of your loan).

Lastly, we should also remind you that the rules mentioned here are only meant to serve as a general guide, helping you to establish a ballpark figure of what you can afford and allowing you to make informed decisions. If you need detailed or specific advice, or if you have a somewhat complex financial situation, then it might be a good idea to consult a licensed financial planner before making any plans or decisions.

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