In Malaysia today, cars are becoming more expensive and are nearly impossible to purchase without using a loan. But is taking a car loan a bad financial decision? Well, it depends on your financial circumstances (specifically your income), how much you benefit from the car, how much the car sets you back financially (maintenance, and repairs), and how much you enjoy the car.
Whether or not you can get your loan approved for the car of your dreams depends on several factors.
The primary concern with car loans is the monthly installment. The basic guideline is to ensure that the monthly installment of the car you desire does not exceed 20% of your salary. Whether or not a bank will approve your car loan depends on their Debt Service Ratio (DSR). Different banks have different DSR limits, so if one bank rejects your application, you can always try a different one.
Keep in mind that total monthly commitments include: housing loans, personal loans, student loans (if any), any bike or car loans - if you already own one. Be realistic with the monthly installment that you can afford. If you have some extra cash in hand and wish to lower the monthly installment amount, you can put in a larger down payment, and your loan amount will be smaller, increasing the chances of approval.
However, all that we have talked about so far will be in vain if your CCRIS (Central Credit Reference Information System) and CTOS (Credit Tip-Off Service) records are poor.
What are CCRIS and CTOS? They essentially report your loan repayment behavior. These records contain information about your repayment behavior. Are you a good paymaster? Do you always pay on time? Have you ever made a late payment? Have you ever let your loans be in arrears for more than three months, or even more?
All of this will be in the record. When applying for a new car loan, lenders will examine your debt repayment record. If you have a poor repayment record, your loan will not be approved. To maintain good CCRIS or CTOS records, simply pay your debts on time.
The highest chances of loan approvals are for those employed in government sectors - a harsh pill to swallow but it's the truth. Banks simply want to ensure they get their money back, with profit (interest). So, the more stable your job is, the easier it is to get your loan approved.
That being said, you can imagine how challenging it is for freelancers and commission-based employees when applying for loans. Banks or credit companies will want to see proof of a stable income, so you can either present your average income over 6 months (bank statement) or your income tax declaration (if applicable).
Aside from your financial credibility, the value of the car also plays a significant role in loan approval. This isn't a problem for brand-new cars - unless you're aiming too high, like applying for a Mazda CX-30 with a monthly salary of RM 1,600. No, it becomes an issue when you attempt to finance a used car. But, why?
The reason behind it is, if you default on your loan, the car will serve as collateral to the bank. The bank will take action against you and attempt to sell the car to pay off the loan balance. That's why the value of the car must be sufficient to settle the loan in these situations.
On the other hand, if the bank values the car lower than you expect, you can try making a larger down payment (to reduce the loan amount), and ask the banks to hopefully approve it. Still not getting approval? Consider other banks.
The economic situation of a country is closely linked to the income vs. debt ratio of the country, political stability, and whether or not a country is affected by external factors - like viruses carried by damn bats surprising the world, all the way from China.
In tough economic times, lenders will be more cautious about who they lend money to. Loan approvals may take longer and requirements may be stricter since banks will conduct a more thorough background check on the borrower.
Unlike a few years back when our country's stability was as certain as a flagpole, it was relatively easier to get loans approved. News flash: Not anymore!
Of course, this is something beyond our control, but if you have a good track record of paying your loans and have a stable income, it should be no problem getting your loan approved in good or bad economies.
Understanding these key factors can significantly improve your chances of securing a car loan. Remember, a well-informed approach to financing is essential for a successful car purchase. May your next car bring you years of enjoyment. Drive safely and enjoy the journey.