Basics of Hire Purchase

Type of Vehicle Financed

There are three types of vehicles in which you can apply for motor financing:

• New motor vehicles
• Second hand (Used) motor vehicles
• Reconditioned motor vehicles

Margin of Financing

Normally, car manufacturers require a 10% down payment on the purchase price of your chosen car. Lenders will then allow you to take a loan up to 90% of the seller’s invoice. If you have extra money, you can choose to pay more for the down payment and as a result, reduce the overall loan amount. Sometimes (to push sales of flagging models) car manufacturers may have promotions which offer 0% down payment.

As such, people who have low monthly income and savings can afford to buy a car by borrowing the full car price through a lender. If you purchase a reused car, the margin of financing may be lower than the margin of financing for a new car and reconditioned car.

Financing Tenure

Financing tenure is the agreement period in which you make regular repayments. Most lenders will provide between a 5-9 year tenure (60-108 months). The longer the tenure, the lower the repayments but the higher the total interest charged.

Interest Rates

Interest rates for car loans are normally charged at a flat rate (What does a Flat rate mean?). Rates charged by lenders vary depending on the your car type (national / non-national and new / second-hand) and the specific model (Myvi / Viva), the loan amount and the loan tenure. Additionally, different banks offer different interest rates based on the factors mentioned.

Types of Vehicle : Range of Interest Rates (%)
New National cars : 2.85 - 4.10
New Non-National cars : 2.30 - 3.00
New Reconditioned cars : 2.65 - 2.80
Used Cars (National/Non-national) : 3.60 - 4.10

Eligibility

Normally individuals aged 18 years old and above, sole proprietorships, partnerships, private limited & public limited companies are eligible to apply for a car loan. For those who do not have a fixed source of income, they have to get a guarantor for the loan (lenders will usually accept parents, guardians etc. who have incomes of their own).

Insurance or Takaful Coverage

An Insurance or Takaful policy is compulsory under the Hire Purchase Act, 1967. You are required to keep the vehicle insured until full payment of the car loan. Furthermore, you are required to inform the owner (the bank, until you own it of course) on the renewal of the insurance / takaful policy within 14 days before the expiry date of the policy.

Late Payment Charges

If you do not pay your monthly installments on time, the bank will charge an 8% p.a. penalty on the amount in arrears calculated daily. For Islamic financing, 1% p.a. compensation fee will charged. This penalty definitely increases the total outstanding amount you have to pay.

Repossession

Repossession will take place when there are two successive defaults of monthly payment, failure to pay final instalment or four successive defaults of monthly payment if the borrower is deceased. The bank will give you a warning notice as a reminder to do a repayment in a certain amount of time. If you haven’t made the repayment after the period stated, the bank will proceed to reposes your vehicle. There are some options provided to you after repossession, you can either pay the entire outstanding amount to get your car back or introduce a buyer to purchase the car. If there is no action taken by you, the bank will sell or dispose the car either by public auction or private sale.

Rebate on Early Settlement

Some banks do provide rebate on early settlement like Maybank Hire Purchase/Maybank Hire Purchase-i. The formula to calculate the rebate is as below:

Rebate on interest = {PMT x (1+2+3+…n)}/ (1+2+3+…k)

Where: PMT = total interest payable

n = remaining repayment period (in months)

k = original repayment period (in months)

For example, Amelia wishes to settle her loan after paying 48 monthly instalments, she will get a rebate on the term charges for the remaining 12 months (loan amount is RM50,000 at 3.0% p.a. for 5 years), total interest payable is RM7,500.

Rebate on interest = {RM7,500 x (1+2+3+…+12)}/(1+2+3+…+60)

= (RM7,500 x 78)/1830

= RM319.67

Graduate Schemes

Good news for fresh graduates! Some banks like Maybank, Bank Islam and Bank Muamalat now offer a graduate scheme which is another type of car loan to fresh graduates aged below 30 who are at least Degree or Diploma holders.

This scheme is only available for first time buyers. The interest rate under this scheme is usually higher than a normal car loan (0.10%-0.20% higher on average). Why? This is because from the bank’s point of view, fresh graduates carry a higher financial risk compared to the older age groups. Why would you take up such schemes since the rate is higher? Firstly, if you are a fresh graduate who hasn’t worked for at least a year, your net salary will probably not meet the minimum requirement for a normal car loan. Besides that, a guarantor is not needed unless you’re applying for an unusually large amount of loan.

How about Loans arranged by Dealerships?

After understanding all of the above information you might ask; Should I be getting my car financing directly from a dealership or a bank? Which one offers the cheapest rates? In all honesty, there is no one clear option. You must be aware that dealerships earn commission from the lenders when you get financing through them. Banks will offer the dealer a lower rate and the dealer will mark-up these rates with their own percentage formula by an unknown amount.

However, sometimes dealers will hold promotions for their cars during festivals or for those which don’t sell well. As a result, during promotion periods, dealership rates might be lower compared to the banks. Our suggestion is, go and get a pre-approved loan at your preferred bank first before you go to a dealership. Therefore, you can compare both rates before you make a decision.

Car Loan Guides & Tips