(Last Updated On: 11/01/2018)

You couldn’t be more wrong when you try to compare the interest rate quoted in hire purchase (HP)  aka car loan interest rate with lending rate, mortgage rate or fixed deposit rate.

HP rate quoted by banks is calculated based on a flat rate. To make an apple-to-apple comparison to simple interest rate quoted in fixed deposit account or house mortgage, we need to convert HP rate to its annual percentage rate (APR). In my previous post here , I have demonstrated how this is done.

Here’s the mind boggling fact: Car loan interest rate is 1.9 times home mortgage rate.

Simply put, if you car loan interest rate is 3 percent for a HP tenure of 3 years, that’s equivalent to 5.68 percent mortgage interest.

hire purchase flat rate conversion

This table is a reference for converting banks’ quoted HP rate into its APR which would be comparable to mortgage/lending/FD rate.

…one of the top secret in personal finance that even most bankers don’t know, not to mention your financial planner, insurance agent or mutual fund consultant.”

As a certified and independent financial planner, I advocate the below:

1.  Try your best to buy car with CASH only
2.  Get the loan with the Smallest Amount and Shortest Time possible (Read: Large upfront down payment and higher monthly loan repayment)
3.  If possible, go for limited edition super famous car.  That way, it may become a capital that may appreciate.

 

Note that point#1 and point#2 is not always applicable especially if you just started working or starting your own business. Point#3 may need some hunting around to accomplish.

 

How to do #1? It’s really  simple but many of us never really thought of this.

 

If you have home equity, refinance your home.
Then use the extra cash to buy car, in cash.

 

Michael and KC Lau teach you on how to do this. Read it here

 

Most people will rebuke the idea because it will show up as red flag in the taxman record you if you do #1, in which, he said:

 

If you really have a property that can get approval from banks to refinance, there is absolutely no concern at all on tax filling.  Upon enquiry by tax department, simply submit your house loan documents and declare no other income whatsoever un-declared in the past.

 

A humorous remark followed:

 

Assuming all people start to do exactly what I share here, there is only one person they will go after – me!  They will blame me for causing them and the banks to lose so much more income.  Bank may start reducing the amount they lend to a property, they will ask if you are using the extra money to buy a car and then they may deny your loan application in future!

 

No, I don’t think this will happen soon because 90 percent of the population is probably ignorant.

 

Car loan interest rate: is no right or wrong

Personal finance zealot will totally shun the idea of buying a car.

Most people will buy a car the moment they get the yearly salary increment. For most, car often represents status, and you will appear rich by driving a nice auto mobile even though you live under the bridge.

Nonetheless, a basic vehicle is almost indispensable nowadays (unless you live in a place with such efficient public transport like Singapore) despite the fact it is a depreciating asset*.

*Ouch, stop adding salt to the wound!

You might said the alternative is cycling but if you stay in South-east Asia, you will sweat like a pig.

Unlike in the States, the person behind the wheels in most South-east Asia countries will run over pedestrian faster than you can blink if you happen to be in their way. You die for nothing.

I kid you not. I’ve stayed in the US for half a year, and are still impressed by the courtesy of US drivers.

Here’s an idea. If you parents can afford to sponsor you the initial (preferably large) down payment (or even better, the cash price of the car), why don’t you negotiate your own hire purchase agreement with them? Perhaps pay them back at the current Fixed Deposit rate. This effectively saves your money.

Now, do you still think your car loan is cheaper than your house loan? Be social, share with your colleague and friends 🙂

*If you are a businessman or a senior manager with company car or car allowance, this article does not concern you at all, really.

Your say?

    10 replies to "Hire Purchase Secret: How Banks Blind side Your Car Loan Interest Rate"

    • Boon

      A follow up question in different context:, appreciate your expert view:
      Say you have 50k as advance pre-payment in the home loan, at prevailing interest rate of 4.6%. And you wish to buy a car worth 50k and the car loan is 2.75%
      Is it better to withdraw this pre-payment 50k in home loan and buy the car in cash?
      OR
      Keep this 50k in the home loan (to reduce interest rate and for other emergency/investment needs) and get the car loan instead?
      thanks!

      • CF Lieu

        The answer isn’t so simple as comparing the interest rates because one is an appreciating asset and another is a depreciating asset. Also given the fact, if you have 50k, and if your income qualifies for it, you probably want to use it to pay downpayment 10% for another investment properties 🙂
        This would be the ‘out-of-box’ thinking.

    • WB

      Good piece here, but I have a doubt:

      Is the FD rate displayed by FI equivalent to flat rate?

      Consider a 1 Year tenure
      A RM10K FD @ 3% p.a. = RM300 in Interest
      VS
      A RM10K HP @ 3% flat = RM300 in Interest

      Consider APR @ 1 Year, RM10K

      A HP @ 3% flat = APR 5.49% (RM300 in Interest)

      If we apply the HP’s APR to FD,
      RM10K FD @ 5.49% p.a. = RM549 in Interest

      That doesn’t tally right?
      Can I deduce that, if I want to regain the interest lost to a HP, my FD amount should match with the HP loan amount?

    • mrupai

      1. The car however is not an asset but liability that consistently reduce in value.
      2. The normal real world rate whatever it is, is secondary.

      If you have to spent 30K to pay the interests during the whole period of the loan, better still to reinvest the extra cash you have initially to get that 30k in the world of investments.

      The extra cash is better reinvest to get more return rather than to purchase the car cash .

      imo.

      • ChingFoo Lieu

        Yeap to a certain extent, esp if you can generate higher return than the annualized interest (or real interest rate) of the car loan.

    • Mohamad

      Thank you for the tips.

      >>Here’s the mind boggling fact: HP rate is 1.9 times home mortgage rate.

      • LCF

        You are most welcome!

    • Nor Azizah binti Che Musa

      Home mortgage is calculated at ‘reducing balance’ thus if you pay your installment more than what you’re supposed to pay, then you will save your money in the long run but for car financing, you’d better just follow the installment schedule because the rebates given in case of early settlement is so much low.

      • LCF

        Exactly, Nor Azizah! Banks have locked you down for the total interest to be paid once the ink dried on the HP agreement. 🙂 Cheers LCF

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