Used Car Loans in Malaysia
According to news coverage by NST Malaysia back in 2021, the sales of used cars between January to May in the said year have been skyrocketing despite COVID-19. The growth hike was reported to soar as high as 20% which amounts to around 347,000 second-hand cars sold.
While there could be plenty of reasons why the used car loan business has grown quite well since early last year — government incentives, having to enjoy convenience with our own car during the pandemic and the list goes on; the means of having a car is practically the same for all of us — to be able to drive towards our destination safely and with ease.
Why should I buy a used car?
Of course, everything depends on your personal preference and financial situation. It is important to ask yourself some questions first before making any decisions such as
- Is it important to own a car?
- What is my overall budget?
- Do I have enough savings to pay for the down payment?
- Can I afford the annual road tax and car insurance renewal?
- How much does the car maintenance cost?
- Is my overall credit in a good condition to apply for a car loan?
One thing worth considering though is that in this economy, buying a used car might just be an option that makes the most sense to some. In a way, it can help us save a substantial amount of money.
Is taking up a car loan to buy a used car a good idea?
In between paying in cash or borrowing from financial institutions and paying back in the form of monthly instalments to buy a used car, which would you choose?
Generally, paying in cash seems like a good idea when we have the means for it. However, some argue that purchasing a car fully in cash may or may not put us in a difficult situation with our tax authorities.
While that argument can either be true or false, most people always result to the most convenient way which is to apply for a car loan.
Tips to buy a used car
So you are looking to purchase a used car. What are some of the things that you should pay attention to before you proceed with the loan application?
Don’t worry, the list is not too exhaustive! Let’s jump into it, shall we?
The age of the used car
A used car that is too old — we are talking about over five years from its manufacturing date; usually has a larger mileage range and depreciates faster over time.
The average age of a used car you should be looking for is between two to three years. This way, you can maximise the price you will be paying. At the same time, minimise the depreciation as too old of a car typically comes with a higher risk.
The mileage range
Referring to the point above, it is important for you to check the mileage range too. Additionally, for used cars, the higher the mileage, the lower the selling price is. But a good range is usually between low to middle numbers.
We advise you to not just look at the selling price. Despite it being a used car, it is best to ensure that the car is overall in a good shape. This way, you can avoid churning out extra money by paying for the repair and service costs.
The past history of the used car
A car can have so much going on in the past and it is a good practice to find out what kind of history the car has before you proceed.
- Has the car been involved in any road accidents?
- Has the car been involved in any flood disasters?
- How many owners has the car had in the past?
- What is the service record of the car?
The above are some of the questions that you can try to dig out from the car dealer or the previous owner.
The interior and exterior conditions
Unlike brand new cars, the interior and exterior of a used car can seem worn down especially if the car is an old model or the previous owner wasn’t taking good care of the car. It is crucial that you ensure that everything is in good condition, albeit not entirely new.
Some of the things that you should make sure are functioning well include the air-conditioner, the signal lights, the radio, whether there is a spare tyre or not, and so much more. You may also ask about the paint of the car if you wish. Be as thorough as you can to help yourself decide better.
What to consider when applying for a car loan?
Also known as a hire purchase, you can find the features in a car loan rather similar be it for used cars or brand new ones. The features you can typically find are the types of interest rates (fixed or variable), the financing tenure, margin of financing and others.
If you have decided to buy a used car using a loan, continue reading as we are going to provide you with the basic things you should consider in a car loan.
Car loan interest rate
The car loan interest rate varies from one bank to another and it is offered either at a fixed rate or variable rate.
Buying a used car (be it a national or foreign model) with a loan, the interest rate is typically higher than a brand new car. Even though the selling price for a used car almost always will depreciate over the years.
Let’s take the CIMB Hire Purchase for example. The bank offers both fixed and variable interest rates. We are going to use the national cars to make a comparison of the interest rates between used and new. Please note that the interest rates shown below are accurate at the time of writing.
For new national cars, you can get a fixed interest rate of 3.2% p.a with CIMB Hire Purchase. Used national cars, on the other hand, come with an interest rate of 4.45% p.a.
Additionally, you can get a variable interest rate of 7.8% p.a. (BLR + 1.70%) for a used national car. Meanwhile, a new national car is being offered with a variable interest rate of 7.45% p.a. (BLR + 1.35%).
Can you see the huge difference between the fixed rate and the variable rate? The latter is steeper because the calculation includes the Base Lending Rate (BLR) of the bank which amounts to 6.10% p.a. as of 13 July 2022. *Keep in mind that the BLR may change from time to time in accordance with the Overnight Policy Rate (OPR) update.
With the options between a fixed rate and variable, which type of car loan should you take up? Again, it really depends on your personal preference and financial situation. But the rule of thumb is always to look for the lowest car loan interest rate possible before you make a final decision.
Margin of financing and down payment
This car loan feature comes in a percentage form. It is to indicate the total financing the bank loans you. Most banks in Malaysia offer up to a 90% margin of financing while the other 10% will count as a down payment and will be paid by you.
Do note that the 10% down payment is the minimum amount. If you can afford it, you can always pay more for the down payment. This in turn will reduce your principal amount and interest rate altogether which results in a lower monthly instalment.
The loan period plays an important role before you make a decision to take up a car loan. This feature can make or break your overall budget to buy a car as it can influence the monthly instalments and the interest rates.
Generally, the longer the loan period is, the lower your monthly instalment would be. In Malaysia, the maximum car loan period is nine years and that is as far as you can stretch.
A guarantor is a person you nominate to the bank to support your car loan application and they are typically your immediate family member, depending on the terms and conditions set by the bank of your choice.
In the case where you are not able to pay off your car loan, the guarantor you appointed is legally bound to pay off the remaining of your car loan including other fees, if any. Hence, we advise you to choose a guarantor that you can trust and also have the capacity and are willing to cover the repayments.
Additionally, if you are a first-time car buyer, you will also be highly likely to bring a guarantor when signing up the car loan agreement.
Early car loan settlement
Yes, it is possible to pay off your car loan earlier than the date originally agreed upon. Depending on the types of car loan you choose, either fixed or variable; each comes with its own set of terms, per the Hire Purchase Act 1967. Let’s use the CIMB Hire Purchase as a reference again.
For instance, if you have undertaken fixed-rate car financing, you are entitled to a rebate which is a refund of the term charges (interest rate) for the unexpired tenure. You may refer to the rebate calculation in the formula shown below.
(Based on Rule 78, as stipulated in the Hire Purchase Act 1967)
On the contrary, for variable rate car financing, you can make an early settlement of your loan by paying off the outstanding amount due, plus the interest charged up to the next due date of payment including miscellaneous charges (if any).
Late payment charges
Similar to any other loans in the market, you will be charged with a late payment fee if you fail to follow through with the agreed monthly instalments.
To provide you with better clarity, let’s make a comparison between the conventional car loan and Islamic ones because each of them has different charges.
For conventional car loans like the Maybank Hire Purchase, the late payment charge can be as steep as 8% per annum which is also typically calculated on a daily basis.
For an Islamic car loan example, we are going to take the RHB Islamic Hire Purchase-i as our reference. As opposed to its counterpart above, should you fail to make the monthly repayments as scheduled, the bank will charge you a compensation rate of not more than 1% per annum on the overdue amount.
And worst comes to worst, the bank as the owner, be it conventional or Islamic, will also repossess your car if you are not following through with the monthly instalments as agreed.
Hence, we highly recommend that you make an informed decision before taking up a car loan. Be sure to make the right calculations and set up your budget properly to refrain from piling up debts that can be avoided in the first place.
As highlighted in the point above, repossession of your car by the bank will only take place under certain circumstances. And these conditions typically include the following:
- If you happen to miss two monthly payments in a row, or
- If you fail to pay the final instalment, or
- If you happen to miss four monthly payments in a row
As you can see, the conditions are strict. After all, the bank is the sole owner of your car up until the car loan achieves its maturity period. So to safeguard the car, do not skip the agreed monthly instalments.
In reference to the Hire Purchase Act 1967, it is compulsory for Malaysian drivers to have valid car insurance if they own a car.
For instance, as stated in Hong Leong Auto Loan Product Disclosure Sheet (PDS), it is mandatory that car owners take up comprehensive car insurance throughout the car financing tenure.
It is the same for Affin Islamic Hire Purchase-i. In addition to taking up comprehensive car insurance, car owners under this financing are also required to inform the bank of the insurance renewal within fourteen days before the policy’s expiry date, as stated in the PDS.
Without car insurance, you will not be able to renew the road tax as well, which according to the law, is an offensive occurrence and should you find guilty, you may be penalised with a hefty fine.
Am I eligible to apply for a car loan for used cars?
Before you proceed with the loan application for used cars, you can check out the general eligibility requirements for most banks in Malaysia as follows:
- Must be at least 18 years old
- Must have a valid driving licence
- Have a minimum annual income of RM24,000 or RM2,000 per month
- A guarantor is required (subject to the bank’s assessment)
- You can apply as an individual applicant or non-individual applicant (sole-proprietor, partnerships, public listed companies, societies, etc.)
What documents should I prepare to apply for a used car loan?
To ease your loan application process with the bank of your choice, the following are some of the general documents that you should prepare beforehand.
- Copy of IC (both sides)
- Copy of a valid driving licence
- Latest 1-month to 3-months payslips
- Latest EPF statement
- Latest 3-months to 6-months bank statement
- Latest BE Form/EA Form with a tax payment receipt
- Copy of Letter of employment
- Copy of IC (both sides)
- Copy of a valid driving licence
- Copy of business registration form
- Copy of Form D
- Latest 6-months bank statement
- Latest Income Tax statement with a tax payment receipt
Note that any additional documents may be required to support your car loan application and it is at the discretion of the bank you have chosen.
Used car loan calculator
Now that you have geared yourself with the basic guides to apply for a used car loan, you can also do a further estimation of your eligibility with a car loan calculator and make a comparison of car loans for used cars on our website.