We’ve heard stories of people entering car dealerships with a heavy bag of cold, hard cash and exiting with the keys to a new car. While that scene is rare – but not impossible – in most cases, you will need a loan from the bank to buy a car.
In Malaysia, the primary method of getting a car loan is via a hire purchase. The loan requires an application from the buyer to the financial institution, but the terms and conditions of the loan vary based on the bank, so it’s crucial to research which suits you best.
Navigating car loans doesn’t have to be confusing, so let’s dive into understanding what a hire purchase is!
What Is A Hire Purchase?
A hire purchase is a car loan that involves the buyer taking out a loan from the lender, usually a bank, to buy the car. The difference between a hire purchase and a personal loan is that although you are the user of the car, the bank is the legal owner as you are ‘hiring’ the car from them.
A hire purchase involves paying a monthly instalment for the vehicle for as long as mutually agreed. Besides that, you are also in charge of the car’s maintenance and insurance, including road tax, servicing, repairs, and more.
The good news is that once you fully repay the loan, the ownership will be transferred to you. But until then, if you fail to make your repayments on time (at least twice), the bank has the legal right to repossess your car.
Hire Purchase Loan Documents
Here are some of the essential documents you’ll need to prepare for a hire purchase application to buy a car:
- Identification Card
- Driver’s license
- Bank statements for the past 6 months
- A copy of the previous 2-6 months of your official salary slip
- A copy of your latest EA or EPF Statement
- An Employment Confirmation letter from your employer
- The car grant of the used car you’re purchasing
Good To Know: Fixed And Variable Interest Rates
No matter which bank you apply for a hire purchase from, an additional thing to consider is the loan’s interest rate.
With a fixed interest rate, the loan’s interest is based solely on the amount you borrow and the loan tenure. Hence, your monthly instalment will be fixed as the same for the very first payment until the last. If you pay extra, it will be considered an advance payment for the next month, and you can clear your loan earlier than expected.
Variable interest rates, however, depend on the bank’s Base Lending Rate (BLR) on the borrowed amount and loan period. That means your repayments may not be the same every month if the BLR increases or decreases, and you might pay more or less.
Additionally, depending on the bank, overpaying your principal amount can help reduce your interest, which reduces your instalment for the next few months. Not every bank practises this, so it’s worth clarifying before you proceed with the loan.
Key Points Of A Hire Purchase
- Interest Rate: Often has a lower interest rate compared to a personal loan.
- Car Ownership: The car belongs to the bank until you fully repay the loan.
- Defaulting On Loans: The bank can repossess the car if you miss payments twice.
Getting A Loan To Buy A Car
Depending on the kind of vehicle (new or used), the downpayment amount differs and is also subject to the loan terms set by the bank. If you’re unsure which loan to apply for, consult a trustworthy car sales advisor who has your best interests at heart for your dream ride.
Once you’ve decided on a loan, one of the first things to do before applying is to calculate your Debt Service Ratio (DSR) to ensure it’s within a safe range. Plus, check that your CTOS and CCRIS scores are satisfactory to increase your odds of approval.
For added measure, look for Mudah Certified cars for sale and use our convenient car loan calculator available on each listing! It provides a rough estimation of your monthly repayment, factoring in the selling price, interest rate, loan tenure, and downpayment for you to make a wise choice for your next car.