Hi all,

I'm about to buy a car and take a car loan. Does it make financial sense to take the maximum tenure available (9 years)?

I know common wisdom has it that you should take a short tenure and pay it off as soon as possible.

But I'm thinking - 9 years means I've to pay more interest but:
1. interest rate is at a historic low of 2.8%. May as well take advantage.
2. lower installments every month hence better cashflow (my career situation is a bit unstable in the short term but I should do well financially in long term)
3. lower installments means I have more money for investments that would likely provide returns above 2.8%

What do you guys think?

should have bought a motor instead. rice already become porridge.

It's never too late to start cooking a fresh batch of abalone fried rice... forget about the past, learn from mistake and never repeat it. Many would have learned the same way too (myself too)

I am afraid I have to ask stupid question,

Maybank2u Savers and Maybank2u Savers-i, what's the main different ?

Both are exactly the same except "Shariah-compliant". What does it mean ?

1. 2.8% is not low. It is what the bankers want you to think. After you convert this 2.8% to APR, it's probably around 5.2% pa (in contrast homeloans are about 4.xx% APR at the moment).
2. If you need to lower the installment per month before you feel comfortable it's probably the wrong choice.
3. ZERO installments mean EVEN more money for investments. And you need to get returns MORE THAN 5.2% in order to 'benefit' from the 'low' 2.8%

If you do not understand why 2.8% flat rate (car loan rate) is actually higher, read page 13-8 and 13-12 of this PDF
http://www.ibbm.org.my/pdf/Chap13_amend%20...05%20060205.pdf

If too hard to understand (it was for me), just remember car loan is more expensive that what you think. It's never a good idea to take a 9 year loan for any car, it's financial madness.

What car and price btw?

The IBBM pdf explains it all, also do check out your own car hire purchase documents. In one of the documentation (normally the carbon copy one), you will see details of the loan, total amount, and most important of all the APR. That is the true cost of that loan... not the simple flat rate interest.

Very simple scenario you can imagine, if you have RM100,000 and you want to buy a car - they are offering flat rate interest of 2.5%. Sounds like a good deal, instead of paying cash for the car, take the loan and with the RM100k, put in FD earning 3.05% interest. In the end you make money still cause car loan only 2.5% but FD 3.05%, right?

Wrong. If you calculate properly (remember you need to withdraw the loan installment amount from the 100k FD every month to repay the car loan) you will see that you actually lose money so how can that be? It's because the interest rate quoted is not the same (like talking mm vs cm) and the 2.5% is actually about 4.5% APR which is more than the FD 3.05%. (Again, IBBM pdf has all the explanation and details, but for simple quick calculation, flat rate x 1.85 would give you the rough APR.)

Go check out your own car hire purchase documents and you will see. Here's an example... flat rate 4.4% but in actual fact it's actually APR 8.19%

Not sure if i understand it correctly. Example they offer flat rate interest of 2.5% means they will charge me 2.5% every year of my RM100,000 loan?

Then APR is calculate in total after loan is settle, how much i pay in interest compare to my loan amount?

Is my understand correct?

Shariah compliant is for Muslims, as it takes away the concept of conventional interest and uses "profit sharing" instead.
http://en.wikipedia.org/wiki/Islamic_banking

The IBBM pdf explains it all, also do check out your own car hire purchase documents. In one of the documentation (normally the carbon copy one), you will see details of the loan, total amount, and most important of all the APR. That is the true cost of that loan... not the simple flat rate interest.

Very simple scenario you can imagine, if you have RM100,000 and you want to buy a car - they are offering flat rate interest of 2.5%. Sounds like a good deal, instead of paying cash for the car, take the loan and with the RM100k, put in FD earning 3.05% interest. In the end you make money still cause car loan only 2.5% but FD 3.05%, right?

Wrong. If you calculate properly (remember you need to withdraw the loan installment amount from the 100k FD every month to repay the car loan) you will see that you actually lose money so how can that be? It's because the interest rate quoted is not the same (like talking mm vs cm) and the 2.5% is actually about 4.5% APR which is more than the FD 3.05%. (Again, IBBM pdf has all the explanation and details, but for simple quick calculation, flat rate x 1.85 would give you the rough APR.)

Go check out your own car hire purchase documents and you will see. Here's an example... flat rate 4.4% but in actual fact it's actually APR 8.19%

I don't understand what you said lah.

To be more precise, Effective Rate > Flat Rate is due to time value of money.

I have posted a simple illustration below in my previous thread to explain the difference between flat rate and effective rate .

Never trust the bank's marketing pitch

your example is the same thing lah... they offer you loan at 4.xx% (like car loan) but as you've calculated it's effective rate 9.xx%.

same goes for car loan... exact same principle..

I don't understand what you said lah.

To be more precise, Effective Rate > Flat Rate is due to time value of money.

I have posted a simple illustration below in my previous thread to explain the difference between flat rate and effective rate .

Never trust the bank's marketing pitch

I don't know if that the same bacause I do not understand your example .

sorry if it's confusing.... just a comparison,

let's say you take RM90k loan for 7 yrs:

1. Scenario 1 - buying a RM100k car, 90% loan at 2.5% flat rate - key in the values into the calculator here:
http://www.autoworld.com.my/v2/tools/loan_payment.asp

and you'll get RM1258.93 per month installment
2. Scenario 2 - buying a RM100k property, 90% loan but at 4.68% APR - key in the values into the calculator here:
http://www.simedarbyproperty.com/home_loan_calculator.aspx

and you'll also get RM1258.56 per month installment.

Notice how in both scenarios we are taking RM90k loan, over 7 years, and monthly installment is almost similar?

If you follow the formula in page 13-12 of the IBBM pdf, you'll work out that 2.5% flat rate is equivalent to 4.68% APR.

That 4.68% is the true cost of the car loan at 2.5% flat rate, that's what I'm trying to say.

ya i understand wat u trying to say but wat the reason that make it like dat?

ya i understand wat u trying to say but wat the reason that make it like dat?

Time value of money make it like that. That's mean RM1 today is worth more than RM1 tomorrow.

Sorry man, I'm not a banker no idea Maybe it's easier for most people to understand if it's shown as flat rate. Also looks better from bank's point of view, as most people will think 2.5% is 'lower' than 4% APR for example...

I mean y when calculate for car it so expensive while calculate property it not so expensive.

Flat rate means the interest will be calculate base on the total amount of loan right. while for property it calculate interest based on the outstanding balance.

So when based on total amount of loan means the interest actually go up together with duration of loan?

can explain like dat: