Food for thought: If one day your friend wants to borrow RM1mil to replace mortgage from you to purchase a house and promises to pay you back via monthly instalments for the next 35 years, how would you react? Personally, my top priority would be to take stringent steps to ensure that I would be able to get my money back.
This applies to the banks too when one applies for a loan especially your mortgage. Here’s a quick summary of the process in three simple, sure-fire steps:
Step 1: Your Profile Matters
Ever wonder why the application forms have so many fields to fill, none of which are related to the property you want financing for? This is because each and every field in the forms give a score towards your eligibility. This scoring is called an “application score”.
The place you live, your marriage status, your occupation and so on will give you points. The higher the points, the better your score and the higher your chance of getting your loan approved. So, remember: do not ask someone to fill your forms for you or leave them blank because this will affect your score.
Step 2: Get your Income Recognized for Credit Rating
How much you earn matters to the bank. You need to make sure all your income can be recognised by the bank with proper documentation. On top of that, how much you earn and your income sources are important too.
Some banks will only recognise a certain percentage of your income especially when that income source is not fixed like commissions and incentives. For example, some banks will recognise only 80% of a commission and some banks will recognise only 50%. You will need to ask the banker how much will be recognised because each and every bank will have a different method of recognising income.
This income will be used to compute your debt service ratio (DSR). This is to check whether or not you can afford the loan. DSR is your existing commitment plus new commitment over your net income after deductions from EPF, PCB, SOSCO and EIS. Most banks will reject your loan if your DSR percentage is more than 70% of your net income and every bank will have a different cut-off for DSR. Do ask the banks what their cut-off rates are to ensure they approve your loan.
We need to be disciplined in keeping good records with the banks. When you borrow, you need to pay your loans on time. Bad records will be recorded in CCRIS and CTOS which banks will review. Once it has been deemed that you have a bad record, your application will be rejected.
Step 3: The Right One Will Get the Job Done
Bankers, lawyers, agents and sales representative are all key players in your property purchase journey. It is advisable that you engage the person who is committed and can guide you. A simple rule is that if they can explain to you all the terms and conditions about your property purchase agreements, then he is experienced and can help you make better decisions.
That being said, it is very important for you to equip yourself with the right knowledge by asking all the crucial questions about the loan.
As a lawyer who has had the opportunity to represent and defend different types of clientele; from medium to large scale businesses, corporations and high net worth individuals, I am occasionally confronted with the odd client who would retort, “This is a pretty standard contract, right? So why do we need to review it? Just sign!” or “Why do we need to take so long to look into this joint venture agreement? Isn’t this pretty much a standard contract?” or worst still “Can you give me a discount since it’s a standard contract!”
In my 15 years of legal experience, I have never come across two contracts that are exactly the same. I have never given any of my clients “standard” contracts because no such thing exists in my books.
Contracts should be crafted according to the particular and specific requirements, needs and requests of the parties involved.
It is always good to remember that contracts once entered into and signed are binding on the signatories. You can’t plead ignorance nor can you say that you did not understand the terms of the contract or that you did not foresee the consequences of breach or non-compliance.
Unless of course you were coerced, forced or unduly influenced into signing the said contract. However, do take note that the threshold of proof for coercion and undue influence is one that is high and onerous.
Oftentimes clients, in a bid to save on legal cost, use “standard” contract templates that they obtain from the Internet. You are forewarned here that doing so and not reviewing the specific terms can lead to devastating legal repercussions.
Let me give you some examples of matters that are not covered in these template contracts that you find on the Internet.
“Jurisdiction” Clauses
The laws applicable in any other country will not be applicable here in Malaysia. This clause is extremely important if you are contracting with a foreign party.
For example, if you are entering into a contract with a party from Singapore but the subject matter of the contract, for example the sale of a factory in Malaysia and the governing laws are Singapore, you will be faced with difficulty in the event litigation arises.
If you have an incompatible or inconsistent clause in your agreement, it will make the litigation process rather cumbersome and costly for you. The issue of jurisdiction will have to be dealt with before the substantive issues of fact and law can be addressed.
This is an unduly protracted and costly affair.
The Appropriate “Governing Laws”
Oftentimes when you use a standard contract, no one looks at the ‘Governing Laws’ clause.
There is a huge difference between the arbitration process and laws as compared to the Court process. Arbitration is an excellent alternative to litigation but if the value of your contract is small and the subject matter of the dispute is straightforward, then the cost of the arbitration process may exceed the value of your claim in itself.
Do not attempt to deal with governing laws and jurisdiction in the same wording. The two concepts are different and the contract should address them separately.
Conflicting Clauses
Let’s assume two people enter into a contract which contains Clause (1) and Clause (2). Further let’s suppose that the two clauses do not contradict one another yet come into conflict with each other. For example:
This contract shall only be terminated upon mutual agreement by both parties
Clause (1)
This contract may be terminated at any time upon written notice to the other party
Clause (2)
Clearly both these clauses can be in conflict with one another. Conflicting clauses are one of the most commonly litigated contractual disputes in Malaysia.
Once there are conflicting clauses, the Courts will then have to resolve the conflict by interpreting and “making sense” of the contract by reading all of the contractual documents in context and also consider parties’ commercial intentions by way of oral evidence in Court.
It is worthy to remember that not all standard contracts are advantageous. A standard contract may not capture the specific needs and circumstances of your business, and therefore not protect you from risks. On the contrary a badly drafted standard contract that you glean off the internet can cause more damage than benefit to you.
Always remember that there is no such thing as a standard contract. You are entitled to negotiate the terms of a contract you wish to enter into based on your own circumstances and facts. Investing in good legal and professional advice will reduce risk and save you a lot of legal cost in the long run.
Lawyer’s fees may seem expensive when you voluntarily decide to hire them initially but it is wise to remember that lawyers become more expensive when you have no choice but to hire them just because you decided not to in the first place.
I saw a news today regarding housing loan, and there are many netizens comment that they took their Employees Provident Fund (EPF) money to settle their housing loan earlier.
Is it a wise decision to take out EPF money to settle housing loan earlier?
Here is an example:
Housing loan amount: RM199,000 Interest rate: 3.15%p.a. Loan tenure: 25 years Outstanding balance at the end of 15th year: RM98,635.60
Based on the information above, if I would like to do early settlement, I have to take out RM98,635.60 from EPF to settle off my housing loan at the end of 15th year (180th month).
According to the calculation shown below, I can save a total of RM16,477.72 interest for early settlement.
However, I could have made a potential of RM62,031.40 dividend if I leave the RM98,635.60 at EPF with expected 5% annual return (expected return based on past performance) for 10 years.
I might be earning additional RM45,553.68 (RM62,031.40 – RM16,477.72) dividend if I do not take out my EPF to settle off my housing loan earlier.
Hope that this simple calculation can solve the doubt of everyone who is planning to take out the EPF to do early settlement.
Yet, I received some queries regarding the high housing loan interest rate of about 4%-5% in 20 to 35 years back, is it worth to take out the EPF to settle their housing loan when the rate increases back to 5%?
Based on EPF historical performance, the time where the housing loan interest rate is at about 5%, the EPF dividend is about 7%-8%. Despite the historical performance does not guarantee future performance, but it can always serve as a guide for us before making our financial decision.
About the Author
Angel Chan is a Licensed Financial Planner attached to UOB Kay Hian Wealth Advisors Sdn Bhd. Besides providing comprehensive financial advisory to her clients, she is also committed to educate the public about the correct financial management mindset and methodology through article, YouTube video and Financial Management Workshop conducted by her and the team. Do reach out to her for more information.
Most of us like to play games in our spare time. But did you know that there are also those who earn a living just by playing games? With the rise of digital games, we now have Play-to-Earn games that rewards its users well enough for those who stay invested in it.
Smart Investor spoke to Mr. Lucaz Lee, Founder and CEO, Affyn to gain more insights on this interesting new concept. Affyn is a newly launched play-to-earn metaverse, that aims to bring people and communities together and allow them to play a mobile geolocation-based game (similar to that of Pokemon Go), and earn Fyn tokens to be used for transactions at the same time.
Let’s find out more from him on this interesting topic.
How Did You Started With Crypto Investment?
I first heard of Bitcoin in 2016, which was worth around USD400. Many people in my immediate circle warned me not to get involved, claiming that it was a sham with no foundation. In my experience, I have learnt to recognise that the best kind of opportunities are those that most people do not understand, are uncertain about and are sceptical of; yet, it is obviously working and growing at a progressive rate.
Unlike today, buying cryptocurrency was a highly complex process back then. My friend and I would spend the whole day figuring out how to buy it. Even though it was complicated and we didn’t understand it, we decided to go for it anyway. Nonetheless, we took the leap of faith first and learned about it later.
How Does Play-to-Earn Works?
The gaming industry has thrived for years, with gaming companies reaping the benefits. While a large amount of money has been flowing into the industry, the players have largely been left out. I believe that the concept of Play-to-Earn will be able to rebalance things so that players can earn while playing games.
Play-to-Earn is a concept where players can earn financial rewards such as cryptocurrencies or NFTs, which can be traded or sold to other players in their games. Most Play-to-Earn games are still largely unsustainable because this is a relatively new concept that many Web 3.0 companies are still figuring out. However, I believe that Play-to-Earn games will eventually transform the gaming industry.
What Do We Need To Get Started?
Typically, an initial capital layout is required in most Play-to-Earn games. To get started, players must learn how to buy crypto and then use the token to buy the NFT. The barrier of entry is too complex for Play-to-Earn games to breakthrough into mainstream adoption.
I think the future of Play-to-Earn is Free-to-Play games where players can download an app, sign up for an account as easily as signing up for a Tik Tok account, play for free, and earn without realising that the whole app is powered by blockchain or crypto.
Can A Player Really Make Money And Turn It Into A Full-Time Job?
Just like in any other industry, what you put into it is what you get out of it. You get part-time results if you put in the part-time effort. There are definitely opportunities for players to make gaming a full-time income, depending on how much effort and time they are willing to put into it.
With The Recent Crash Of The Crypto Market, Is Play-to-Earn Affected?
As someone who has been through the bull market of 2017 and the crash and bear market of 2018, I can say that no cryptocurrency is immune to a crash. The Play-to-Earn ecosystem will undoubtedly be impacted. When there is a crash or a bear market, it usually means that speculative money is leaving the ecosystem. Products with utility will thrive because, while speculative money is leaving, money will flow into games with utility and demand.
Play-to-Earn games have the potential to thrive in bear markets because people are looking for financial vehicles to generate income when the economy is bad. Despite the fact that it has yet to be proven, I believe Play-to-Earn games can thrive during bear markets.
What Are Your Plans For The Future?
We intend to become the largest and most successful platform that creates fascinating experiences for our users through gaming and lifestyle, where they can earn virtual rewards and spend them in the real world within our lifestyle ecosystem. It’s also free to play.
The impact of the pandemic on organisations has been uneven, both in Malaysia and elsewhere. While some adapted well and thrived, others were less fortunate, often at no fault of their own, and had to restructure or shut down their business.
Regarding the trend of digitisation, it is not new given the well known benefits of cost savings and increased customer engagement. However due to lockdowns and business disruptions, this trend became less of an option and more a matter of survival.
We recently got in touch with Inter-City MPC (M) Sdn. Bhd, a homegrown company with over 30 years of experience that focuses on clients’ digital transformation. This includes data document processing, record management services, and many more that can help us embrace the changes caused by the pandemic.
How Has The Pandemic Affected Organisations All Over Malaysia?
“As a service provider of physical and digital end consumers statements, Intercity recognized the opportunity and expanded into digital transformation – that being we work with clients to solve the challenging task of transitioning statements and end consumers from print to digital, including data transition, process improvement across all modes (paper or digital), and omnichannel sending (mail or emails)”, said Nick Liew, Chief Executive Officer of Intercity.
What It Requires To Go Digital?
As a business owner, you will need help to go digital because the transition itself is challenging. There are three things that you need to look at:
Data transition: Going from print to digital requires high-quality data. You need to run a series of campaigns to collect end consumers’ data on behalf of clients, from web links to on-ground surveys.
Record transition: From physical records to digital records. You can do this by scanning, digital archiving and secure destruction of physical records for data privacy.
Process transition: From physical forms to online registration. You will need to run processes such as data entry and call centers to further support end consumers who are not fully digital.
Are The Organisations Now More Open To Go Digital?
According to Brandon Smith, Chief Commercial Officer of Intercity, “Organisations continue to identify specific business processes or operating segments that can shift towards adopting digital methods, especially where there is potential for revenue gains, cost savings, or efficiency improvements.”
Intercity understands these business objectives and tailors our offerings to ensure our digitisation offerings are impactful and deliver real value.
How Does Organizations Transform Themselves?
For example with Majlis Bandaraya Shah Alam, they managed to increase the collection rates of quit rent (cukai pintu) by 30% in 2021. The increased revenue to the local council was crucial to support ongoing frontline services like waste collection and local infrastructure maintenance, especially at a time when many were working from home.
In the case of Majlis Perbandaran Klang, they are able to optimise their mailing of local resident statements and bills, resulting in a 25% cost reduction in 2021, in preparation for further digitisation efforts. These cost savings were then quickly allocated to other crucial services during the pandemic.
“Besides cost savings, digitisation supports the broader goals of environmental sustainability. Given our clients’ focus on impactful ESG actions, from 2020 to 2021 Intercity worked with their clients to save approximately 140,000kg of paper which is the equivalent of saving 3,400 trees,” said Nick Liew.
With The Rise Of Inflation And Interest Rates, How Does Intercity Help Its Clients To Weather The Storm?
As organisations review their operations to adjust to rising costs from inflation and interest rate changes, there is a trend to focus on their core businesses while delegating non-core processes to specialist external service providers to save costs.
In an inflationary environment, Intercity is not immune to supply chain disruptions and rising raw material costs. However as a specialist service provider, Intercity has sufficient scale and ability to manage input costs thus ensuring minimal cost increases for our clients.
To take it one step further and exploit cost savings from digitisation, clients work with Intercity to transform their end consumers’ communication from physical to digital.
Brandon Smith says, “To do this, Intercity runs a digital BPO service on behalf of clients to ensure full communication via print and/or digital channels. The BPO service includes multi-stage data collection, a step-by-step physical-to-digital shift by customer segments, and hands-on technical development & support.”
As a dividend investor who derives dividend income regularly from a portfolio of dividend paying stocks, I believe all of us can move towards financial freedom investing in the same. However, many fail to build additional income or grow wealth sustainably over the long-term despite having a sincere desire to move ahead financially.
So, where do we fall short?
In this article, I will list four major mistakes that most people make when attempting to make money from the stock market.
1. Investing without a Plan
First, investing starts with one having an investment plan.
Basically, it has four key elements:
Your Current Financial Status
Your Future Financial Goals
Duration
Choices of Investment Vehicles and Strategies
An investment plan is likened to one planning a trip. It starts with where you are now, where you want to be, when you intend to reach your destination, and how you intend to get there safely. The subject of investing is confusing but usually this is due to one trying to invest without having a plan beforehand. It is like driving around in circles when investing their money.
This leads to:
2. Investing Becomes a Game of Chance
Today, we have 900+ stocks listed on Bursa Malaysia. Which stocks should you invest in?
Logically, the answer depends on your investment plan as it helps you select stocks that would propel you towards financial success. However, many do not bother to sit down and have their plans crafted as the process seems boring. Thus, how would most people pick their stocks?
Feel, Guts, and Emotions?
Colleagues, Friends, or Relatives?
Stock Tips, Rumours, and Commentaries?
As such, many treat stocks like lottery tickets. They may buy stocks out of hope after having heard of some “exciting news” about them. Many expect the prices of these stocks would go up forever. It is a fallacy as they would soon met with disappointment when their stocks fall in prices. This leads us to:
3. Buy High, Sell Low
Ideally, success in investing revolves around four words: “Buy Low, Sell High”.
However, it is easier said than done. As mentioned, many buy stocks after gaining knowledge of exciting news about them. What is this news usually about? In most cases, they are about stocks that have experienced the highest appreciation in a short span of time. Instead of “Buying Low”, many resort to “Buying High” as they want to join the bandwagon.
Usually, a savvy investor would stay away from such stocks or would have sold their shares at high prices (“Sell High”).
This is a reality of the stock market. Stock prices go up and come down. It is the norm and hence, a savvy investor would have prepared for what to do if his or her investment fell in price. But since most people do not have a plan, they panic when prices drop and “Sell Low” out of fear even though they “Bought High”.
At these times, an investor with know-how would enter the market to accumulate more of these stocks as their prices would be trading at a discount (“Buy Low’).
This brings us to the next question: What gives these investors the guts and confidence to invest in stocks when their stock prices drop?
4. Not Treating Stocks as Businesses
Investing is more intelligent when it is businesslike.
Warren Buffett, the living legend and an example of how one who can amass billions by investing, advised not to speculate the markets.
So, what is the meaning of being “businesslike”? It is one who views stocks as businesses which own assets and generate profits and cash flows from their customers. Thus, an investor would first study, in great length, a stock’s business models, financials, and its future plans for growth. If the stock is fundamentally solid, he proceeds by assessing its stock price and would only commit his capital into it if its prices are relatively cheap. This explains why savvy investors, like Warren Buffett, can be confident on their stock purchases in a bad market.
Regrettably, many do not view shares as certificates of ownership of a business and thus, buy stocks with little knowledge on what businesses they are into and how much money they are making. It is a mistake and the biggest downfall is one who bought into stocks where their businesses are unprofitable.
Think about it. Are they able to grow shareholders’ wealth sustainably over the long term? In short, it does not take a genius or a crystal ball to build a stable and a regular source of income from stock investing. It takes a plan, logic, willingness to learn and a business mindset to profit consistently from the stock market.
This article was written by Ian Tai. Ian can be reach via email iantai888@gmail.com.
Insurance planning is the foundation of a good financial plan, ensuring that you have a backup plan to provide enough family income and to fund medical expenses in the event of unforeseen circumstances such as premature death, total permanent disability, critical illness, accidents and hospitalisation, in terms of personal risk.
You should also extend your insurance planning to cover properties risk, liability risk and professional liability risk based on your circumstances and needs.
In the financial planning process, you must first determine your current financial position and make sure you have emergency funds for six to 12 months before you proceed to insurance planning.
With proper assessment of your current financial position, which includes your cash flow and net worth statements, you can determine your insurance needs more clearly in terms of family expenses and outstanding debts obligations.
As a financial planner, I would normally advise my clients to have adequate emergency funds and insurance coverage before they consider venturing into investment. As far as investment is concerned, all investment assets need time to mature to meet your financial goals without any disruption from personal risks, property risks, liability risks or professional liability risks arising from unforeseen circumstances.
Insurance serves as the cheapest and most effective tool to cover potential financial losses without touching your investment assets.
When engaging in insurance planning, seek advice from your trusted professional financial advisor to assist you while working out which insurance plan will best fit the requirements of you and your family, according to the following guidelines:
What kind of insurance do you need?
What will your insurance policy cover?
How much insurance coverage do you need?
How much will you be paying for the insurance coverage?
What happens if you fail to pay the required premiums?
Should you replace an existing insurance policy?
What happens if you terminate your policy?
Your active participation is required when working with your financial advisor to work out an insurance plan that best suits your needs. Be honest about your financial situation. Communicate your goals and objectives. Do not be afraid to ask questions!
In the attached charts, I have provided some guidelines as to the types of insurance coverage to consider. You may then determine the quantum of coverage to ensure you and your loved ones are protected. Take time to make your decision. Regard your financial advisor as a trusted partner, and not merely a salesperson.
What Type of Insurance Do You Need?
If you are worried about…
You may want to consider this type of insurance…
How it helps…
Life insurance
Death of breadwinner
Life
Provides some money for your family if you die.
Total & permanent disability
Life
Provides some money for your family if you suffer from a total or permanent disability.
Death of mortgagor/main borrower of home loan
Mortgage term reducing insurance (form of life insurance)
Pays off mortgage if mortgagor dies.
Health insurance
Trauma/critical illness
Critical illness
Pays a portion or lump sum on first diagnosis of serious illness.
Medical bills for major illness or accident
Medical expense, other hospital and medical plans & riders
The main medical expense insurance plan pays a portion of hospital and surgical costs if you are ill or suffering from injuries due to an accident. Complementary plans such as riders cover co-payment portions (eg deductibles and co-insurance) that are not covered under a main plan.
Long-term care for disability
Long-term care, eg supplements
Pays a fixed monthly amount for long-term treatment upon the insured’s inability to perform a number of “activities of daily living” like bathing, dressing, etc.
Loss of income because due to hospitalisation
Hospitalisation cash plans
Provides income if you are hospitalised.
General insurance
Loss of or damage to your belongings
Home contents
Pays for repairs or replacement if you suffer loss or damage to your home or contents. If you are renting your home, it’s your responsibility to cover loss of or damage to the contents of your home.
Damage to car/theft
Car
Pays for repairs or replacement if your car is stolen or damaged.
Damage to your home
Fire/home
Pays for repairs or replacement if you suffer loss or damage to your home as a result of perils such as fire, flood, and burglary.
Loss of luggage/trip delays/cost of medical care while travelling
Travel
Pays for repairs or replacement if you suffer loss or damage to your belongings. Also pays for financial loss if there are delays or cancellations. Pays for costs related to personal accidents while overseas, including medical and repatriation expenses.
About the Author
Tan Kim Book, CFP, IFP is a Licensed Financial Planner with Phillip Wealth Planners Sdn Bhd and certified member of Financial Planning Association Malaysia (FPAM).
Working with a financial planner can be an extremely rewarding and valuable experience for you and your family. If you’ve decided to work with a financial planner, it’s important to understand your rights in the professional relationship. By knowing your rights and what to expect from a financial planner, you can take an active role in shaping your financial future.
1. You have the right to a planner who has integrity
Trust between you and your financial planner is central to a successful financial planning relationship. You rely on your planner’s honesty, professionalism and abilities to achieve your financial and life goals.
When you know that your financial planner takes his or her professional obligations seriously, placing principles over personal gain, you can develop the type of partnership that is crucial to the success of any professional relationship.
2. You have the right to objective advice
Your needs should be at the heart of all recommendations made by your financial planner. Your financial planner should use his or her experience and judgment to carefully consider your situation, and provide you with advice that best meets your goals.
Sometimes, this objectivity may require your financial planner to explain that your goals are unrealistic given your current resources and financial commitments. He or she may then suggest alternative goals or priorities.
3. You have the right to be treated fairly
Your financial planner should treat you the same way he or she would like to be treated in a professional relationship. This involves clearly stating what services will be provided and at what price. Your financial planner should also explain the risks associated with his or her financial recommendations and any potential conflicts of interest.
For example, does her or she gain personally or financially from your purchase of a particular product, or from the outcome of a suggested strategy?
4. You have the right to a planner who is professional
Your financial planner should not provide investment advice or stock brokerage or insurance services unless he or she is properly qualified and licensed to do so. If your situation requires expertise that your financial planner does not have, he or she should suggest other professionals who may assist you.
5. You have the right to a planner who is competent
You have the right to expect your financial planner to demonstrate an appropriate level of knowledge to offer financial planning advice, such as the attainment of CERTIFIED FINANCIAL PLANNER certification, the standard of excellence in financial planning. Your financial planner should complete continuing education courses as part of his or her ongoing commitment to competency.
6. You have the right to privacy
To get the best results from your financial planning relationship, you need to divulge relevant personal and financial information to your financial planner on a regular basis. Your financial planner should keep this information in confidence, only sharing it with others to conduct business on your behalf, at your consent, or when required to do so by court order.
7. You have the right to a planner who is diligent
Your financial planner should discuss your goals and objectives with you and explain what you can expect from the relationship before engaging you as a client. Once the financial planner has determined that he or she (or his or her staff and/or network of related professionals) can assist you and has gathered sufficient information, the financial planner should make – and, if appropriate, implement – recommendations that are suitable for you.
A diligent financial planner reasonably investigates the products or services he or she recommends. A diligent financial planner also closely supervises any staff working with you.
This article is courtesy of Financial Planning Standards Board Ltd (FPSB).
For many people, there’s nothing quite like taking delivery of your brand new car. However, taking on long-term loan to buy a car can have serious repercussions on your financial health.
We’ll take a look at the key issues and the ramifications of buying a car.
Question:
Hi, I’m Denise. Some people say the one single monthly commitment which can make or break your wealth building is payment of car loans. Is every car loan an upside-down loan as most cars depreciate much faster than we can settle them off, especially if we take a 7 or 9-year loan? In your opinion, how best to finance a car purchase? Is it in cash or a car loan?
First, what does Denise mean with “upside-down loan”?
If your car value depreciates faster than you pay off your loan, you will need to come up with extra money out of your pocket to repay the bank.
For example, when you sell your car at RM20,000, but your outstanding loan is higher, say RM25,000, you will need to fork out that difference of RM5,000.
In other words, it is negative equity.
That might happen in any of these situations:
If you have a long tenure hire-purchase loan like nine years;
You buy a car that depreciates too fast i.e. depreciates 50% in two years, versus some brands that only go down 50% after five years; and
You finance the vehicle up to a maximum of 90%, 100% or even more after the mark-up price.
Or any combination of the above situations, you might end up with an upside-down loan.
Back to the question:
So, what is the best way to finance a car purchase? Should people only buy with cash, and only if they can afford to pay for the car in full?
To understand this issue, you must separate the subjects into two parts:
The Car And Its Value
Let’s get this straight. The value of a car falls over time. It doesn’t matter if you finance it with cash or with a car loan.
The higher price you pay for it, the more you lose. Whether you pay cash, or pay with a short three-year loan, or a long-term nine-year loan, or you only borrow 50%, regardless how you pay for the car, the car still goes down in value at the same rate.
It doesn’t matter.
The buyer of your used car won’t bother whether it the loan has been settled. They don’t pay you more because you don’t have a car loan. They might pay you more if the used car is well-maintained and looks good.
So, can we agree with these?
If you want to lose less money, just buy a cheaper car. Buy a better brand that depreciates less comparatively. Or the best choice, don’t get a car if you don’t need to. Buy the car that fits your needs now.
Don’t make the mistake I made. I used to own a 12-seater Hyundai Starex, and it was too big for my small family.
So, if you wish to be prudent about it, you may consider having a lower-priced car that serves your daily needs, or not get one for a car is a liability and its value depreciates in the long run.
How To Finance The Purchase
Now the second part is the one you want to consider – how to finance the purchase?
Short answer: That depends on the rate of return on your fund.
After you decide what specific brand, model and specification of vehicle you are going to get, the next step is to find out the cost of financing the purchase.
If you have 30,000 in a fixed deposit earning 2-3%, you might as well use that cash to pay for a car loan which will cost ~4%-5%.
On the other hand, if you have a stock holding that yields 8% a year, you should take a very long term car loan (nine years). So you keep your stocks… and earn the difference (8% stock yields – 5% car loan interest)
Does that make sense?
In summary, if you are a good investor, and you make an investment return that is way better than 4-5% you pay the bank, it is no-brainer to decide. Take the most extended loan that can offer the cheapest financing cost.
Debt Service Ratio (DSR)
So, let’s say you made that car purchase and your car loan installment amounts to RM 1,100 a month. If you earn RM 5,500 a month, the car loan installment is equivalent to 20% of your monthly income. This works out to be a DSR of 20%, that is if you have no other outstanding debt.
If you have other debt commitments such as a student loan (PTPTN), credit card debts, personal loans… etc, you may want to assess what your DSR is after you buy your car. For instance, if you are paying RM440 a month in PTPTN loan installments, you would increase your DSR from 8% to 28%.
Before buying your car
= (Existing loan commitment / Monthly income) x 100%
= (RM 440 / RM 5,500) x 100%
= 8%
After buying your car
= (Existing loan commitment + Car loan installment) / Monthly Income) x 100%
= (RM 440 + RM 1,100) / RM 5,500) x 100%
= 28%
So, What’s The Significance?
First, calculating your DSR will help you to determine if you can really afford the car purchase with a car loan. For instance, if you find that your DSR after buying the car is above 40%, you may want to reconsider because you could be over gearing. You could put yourself in financial distress if you lose your job, business or your sources of income.
Second, do you plan to buy yourself a home or an investment property some two to three years down the road?
Here is the thing. Little do people realise that the same RM1,100 monthly installment for a RM90,000 car loan is worth as much as RM220,000 in property mortgage.
Essentially, you are committing RM1,100 a month to get a RM90,000 car loan to buy a car that depreciates in value over time while forgoing your opportunity to acquire a property worth RM240,000 that could generate rental income and appreciates in value over time.
So, if you’re looking to buy a property in the near future, it would be helpful for you to refrain from getting a car loan and use your loan eligibility or quota for a piece of real estate.
The Final Piece Of Advice: Don’t Do The Following!
The above discussion is based on the assumption that you already have the money to buy the car. I strongly suggest that you put yourself in this position before considering to upgrade.
A car loan can only break your finances if you are spending your future money to buy it. That means you don’t have the money ready for the car.
So, you take up a loan to buy a car that is not affordable to you, perhaps to impress your colleague who just showed off his latest vehicle.
That’s a big NO-NO. Please refrain from doing that.
Don’t buy something you don’t need, with the money you don’t have, to impress the people you don’t like. That’s plain stupidity.
About the Author
This article is co-written by KC Lau and Ian Tai.
Ian Tai is a Dividend Investor. Financial Content Machine. Producer of 200+ Articles, Weekly Host and Presenter at KCLau.com. Co-Founded DividendVault.com, an online educational membership site that empowers retail investors to build a stock portfolio that pays rising dividends in Malaysia and Singapore.
KCLau is a financial educator, having published seven books including the current bestseller Money Smart, and co-created a dozen online financial courses. He gives away his popular Money Tips e-book volumes free at his website: https://KCLau.com
Hi, my name is Ed. I’m happily married to Pei Pei, my wife and together, we’ve been blessed with two daughters namely, Cindy and Mandy aged 5 and 3. As I write, we reside together with my mother in a bungalow located in Penang.
The property has been a family home since my childhood and its ownership was bequeathed to me by my late father who passed away three years ago. Presently, the bungalow has been fully paid off and is valued at RM2 mil.
If I pass on prematurely, I wish to bequeath this property equally to my wife and two daughters via a will. But, I have the following questions and concerns:
a. Will my mother be allowed to continue to live in the bungalow?
b. What will happen if my wife and two children wish to sell off the bungalow?
c. Is it possible to only bequeath the title deed when my daughters attain the age of 25?
Answer:
Lets say, you have a simple will written for the purpose stated above.
If you pass on, the title deed to your bungalow shall be transferred to your wife and two children by your appointed executor. If Pei Pei is the executor, she then shall hold onto your daughters’ stake in the property until they turn 18, the age when they are legally entitled to inherit and hold onto assets.
This means, if your children are minors, Pei Pei shall have full autonomy to hold onto and manage the bungalow as she sees fit upon your passing.
Your wife has the authority to decide who shall reside in the property, apply for loan facilities by offering the property as a collateral and to dispose of the bungalow to a new prospective buyer based on her agreeable price.
Sadly, this could also mean that Pei Pei:
Has the authority to ask your mother to vacate the bungalow.
Can sell the bungalow, let’s say at RM3 mil, and pocket the full proceeds into her bank account without needing to share her gains with your mother and… your two children.
Can obtain a loan facility from the bank via refinancing for the purpose of setting up a new business. The venture may fail which could cause Pei Pei to lose her ability to repay the mortgage and thus, leading to a possibility that the bungalow could be auctioned off by the bank.
Can remarry and enjoy her new life with her husband, your two daughters and maybe, her children with her new husband in the bungalow bequeathed to her. Your bungalow or a portion of it could be bequeathed to the new husband and their children via Pei Pei’s written will. OMG!
But My Wife Is Not That Bad…
Of course, your wife is of noble and virtuous character. How could it be possible for your wife to do any of the above mentioned?
I understand. Here, the purpose is to highlight the various possibilities open to your wife legally after having received the title deed to the property if you pass on prematurely and especially if your daughters are still minors.
Thus, bequeathing the bungalow to your wife and two daughters does not offer an ironclad guarantee of your mother’s livelihood upon your passing. This could potentially lead to conflict, strife and bitterness to your loved ones namely your mother, wife, and two children.
So, What Can Ed Do About It?
The answer is simple. Ed could include a testamentary trust in his written will in order to have a say in how the bungalow is to be managed upon his passing.
A testamentary trust is a trust that kicks in effectively only upon Ed’s passing for the trust is embedded within Ed’s written will. Here is how it works:
Ed could set up a testamentary trust where he would engage a licensed trustee firm to be his trustee and name Pei Pei, Cindy and Mandy as his beneficiaries of the testamentary trust.
Ed could decide when is best for Cindy and Mandy to inherit their stake in the bungalow. Here, let’s say, Ed wishes for his two daughters to only receive their stake when Mandy, his younger daughter, reaches the age of 25.
Ed could name his mother to be the living tenant of the bungalow. This means his mother is entitled to reside in the property for as long as she lives. The property could not be sold to a buyer as its title deed shall be held by the trustee.
Upon Ed’s passing, the bungalow’s title deed will first be transferred to the testamentary trust. The trustee shall hold onto it for Pei Pei, Cindy, and Mandy.
The property’s title deed shall only be bequeathed to Pei Pei, Cindy and Mandy after fulfillment of two conditions in the Testamentary Trust:
a. Ed’s mother has passed on. b. Mandy is 25 years old.
Conclusion
Ed could protect the interest of his mother, wife and two daughters by having a testamentary trust included in his will and appointing a licensed trustee firm to administer his estate upon his passing.
His mother is guaranteed a place to stay and thus, securing her livelihood in her golden years. His wife and children shall be guaranteed of inheriting their stakes in Ed’s bungalow for as long as they live past Ed’s mother. This helps to maintain harmony among Ed’s family members.
About the Author
Jocelline Chee is the founder of WG Legacy, a leading professional estate planning firm. You can download a Strategy Report at wglegacy.com/report to find out how she preserved her family’s financial future via a combination of insurance, will and trust and how you can do the same for your loved ones too.
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