Purchasing a car is a big decision to make as it involves a substantial sum of money. Essentially, there are four ways to determine how you can finance the purchase of your next car.

Keep in mind however that these are merely personal suggestions, the ultimate decision lies in your hands.

Decide on the down payment

If you intend to buy a RM100,000 car, would you prefer to:

• Pay RM100,000 in cash for it without obtaining a car loan?
• Pay RM10,000 in cash for it and finance the rest of it with a car loan?

There are some who prefer the former over the latter as they intend to be debt-free. If they do not have RM100,000 in cash, they will place a larger deposit for the purchase of their next car as they want to save on interest costs.

Personally, the latter is the better alternative. Why? This is because, if one pays out RM10,000 only, the remaining RM90,000 can be used in the following ways:

• Reserve funds to service all other debt commitments and living expenses.
• Funds to invest to generate passive income.
• Emergency funds to meet ad-hoc or unforeseen expenditures.

So, are the above justifiable enough reasons for you to keep the RM90,000 and incur a 5%-6% interest cost per year in effective interest rate on your car loan? The answer is a resounding yes.

Decide on the loan tenure

If you are to obtain a car loan of RM90,000 at a 3% flat interest rate per year, the question is, ‘Will you obtain a:

• three-year loan, where the instalment is RM2,725 a month?
• nine-year loan, where the instalment is RM1,058 a month?

Many people reason that they want to be debt-free as soon as possible and save the number of interest payments will opt for a three-year loan.

Personally, the latter is better. This is because:

• The effective interest rate for both loans are similar at 5%-6% per annum.
• You will have a lower debt-service ratio (DSR) if you opt for a nine-year loan.
• You will have an easier time to service your car loan if your income falls.

From all of the above, a greater emphasis should be placed on keeping your DSR low.

Why so? This is because you can use debt to finance the purchase of assets, which could generate increasing and recurring income, hold and appreciate in value in the long-term.

Real estate is an example of such an asset and one awesome thing about it is this: interest rates for mortgages are lower than interest rates for a car loan.

Therefore, a nine-year loan to reduce monthly debt repayments and reduce DSR, will give you a higher loan eligibility for purchases of income-producing, value-appreciating real estates in Malaysia.

Establish what having a car means to you

How does one determine the maximum price that should be paid for a car?

That depends on what a car is to you. Is it merely a transportation vehicle, moving you from one place to the next? If that is so, there should be more Protons and Peroduas on the road.

But, the above is not a reality. People tend to perceive one who drives a Mercedes Benz to be richer than one who drives a Myvi. But is that perception really true? Not really.

But, why would one buy a Mercedes Benz, BMW or aFerrari if they were broke after buying them? It’s only because buyers attach different values to what a car is.

So, you have got to be clear of the values you attach to having a car. To you personally, does it mean:

• Independence?
• You have become a man or an adult?
• Belonging to an exclusive club membership like the Ferrari Owners’ Club?

Four months’ income determines the car you should buy

The maximum car price should be less than four months’ worth of income. This means, if you earn RM5,000 per month, the maximum price of a car you could afford is RM20,000.

A brand new manual Perodua Axia 1.0E, which is the lowest specification of the model, costs RM23,367 and thus, making it not really affordable among those who make RM5,000 a month.

Here’s another question to consider:

• How many months of income would you ‘sacrifice’ to pay for your car?

• Would it be 12 months, 18 months or 24 months?

This means, if you earn RM5,000 a month and are willing to sacrifice 12 months to buy a car, then, the maximum car price would be RM60,000.

If it is 18 months, then the car price is RM90,000.

Finally, if it is 24 months, the maximum car price would then be RM120,000.

So, the question that you should ask yourself is, “How long would you want to slave for a car?”

This article first appeared in kclau.com.

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.