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.
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:
Car loan interest rate: is no right or wrong
Personal finance zealot will totally shun the idea of buying a car.
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.