If you're planning to buy a car with cash, there are some things that you should know and steps you need to follow. Read this article to find out!
For many of us, financing a car is the most obvious and common solution when it comes to buying a car. With the average cost of a used hatchback car in Malaysia ranging from at least RM23,000, very few people fancy the idea or could afford to pay their car in cash.
Despite the rarity, buying a car with an up-front one lump sum payment comes with its own set of perks, for example, bypassing a loan - and its interest - which is a win for you in the long-term.
But interest aside, and the fact that it's sort of an admirable goal that tests your own willpower and financial strength, is buying your car with cash actually the smarter and wiser choice?
Before diving any deeper, let's first address the elephant in the room - a car is one of the most expensive investments - with a low ROI - that you’ll ever make. From what we found, a car with an average market value of RM50,000 and power of 1,400cc comes with an additional cost of RM5,000 - give and take - for road tax, insurance, maintenance and service and petrol.
That doesn’t include other non-expenditure factors like how much you drive, where you live, and of course, how much you borrow from the bank to buy it. The bottom line is we spend a lot on cars, and most households have at least two or more cars - imagine the amount of cash we can all save up if we took public transportation.
But cars are also a necessity - they help us get around conveniently, which is why people don’t mind investing in it. The next question is what's the best way to finance it?
In this article, we will explore whether buying a car with cash is worth it as we believe that there are plenty of reasons to pay cash for a car and there's a number of ways to do it.
Four reasons to buy a car with cash:
1. You spend less overall
Similar to how excruciating it is to put down money for a house downpayment, paying your car in cash is tough, but it keeps you disciplined and focused on securing your investment.
Paying via a loan contract is easier because it doesn’t take that much emotional and mental dedication - to a degree. It’s still as terrifying, but not as much as paying with cold hard cash.
Although financing or loans helps us feel much more secure because the money isn’t directly and immediately being withdrawn out of your bank account, it will result in a higher final cost because of the interest rates over time.
At the same time, financing may tempt you into buying an expensive car, though you had initially set your plans at a certain budget.
2. You avoid paying interest
This is pretty self-explanatory but by not financing your purchase, you automatically avoid paying any interest. When you pay your loan with interest, it affects the total price of your car, making it more expensive.
To illustrate this, let’s use this simple example:
By the way, when it comes to car loans, the stated interest rate is not the same as the real interest rate (called the Effective Interest Rate, or EIR). That’s because car loans always use what’s called a flat interest rate. With a flat interest rate, the amount of interest you pay is fixed upon the principal.
For example, say the loan amount is RM84,000, and the interest rate you pay is 3.4% per annum for seven years. Using the “rest rate method” of calculation, the interest you pay is based on the principal (the original loan amount) of RM84,000 every month.
So the interest payable works out like this:
Your interest per year would be: 3.4% of RM84,000 = RM2,856.00
Total interest paid over 7 years: RM2856.00 x 7 = RM19,992.00
Now, added to your initial loan of RM84,000, the total amount you need to repay is (RM84,000 + RM19,992.00) = RM103,992.00
Divided over a period of 84 months, that comes down to RM103,992.00/84 = RM1,238 per month.
In this case, the effective interest rate (EIR) for this car loan is 6.27%. In the simplest words, EIR is the true rate of interest earned, factoring in compounding effect.
But there are two things we wanted to highlight here: one, with a loan you’ll need to pay an additional RM19,992.00 over the course of seven years! Secondly, this brings your total repayment amount to RM103,992 which is way more than the initial RM84,000 you took up.
Another thing worth mentioning is that without a car loan, you avoid monthly repayments as well.
3. You build financial resilience
Though most investments will require some form of discipline, paying your car with cash is a great way to build up more financial skin or financial resilience.
The amount of effort it takes to save up to buy a car with cash will be akin to training wheels on a bike - a good starting ground for you before you take up much bigger financial commitments like a mortgage, for example.
Once you develop discipline in this one area of your life, it will automatically spill into other areas of your life and serve you well in the long term.
4. You learn to prioritize other financial goals
This may sound a little biased, but if you pay your car in cash, you could be forced to, or willingly, dedicate more time and commitment into other financial priorities that could be relatively more important (i.e. mortgage, your business, credit cards, personal etc.).
By the way, if you are on the lookout for credit cards or personal loans, it doesn’t hurt to check out our website as we offer the convenience of being able to compare different offerings at the tip of your fingers.
Learning to prioritise also opens up the opportunity to really make an assessment of what is most important to you: a car versus a mortgage versus credit cards and more, as most people have multiple - if not at least one other financial commitment -besides their mode of transportation. It’s not about picking favourites but really about prioritising what matters to you the most.
For example, maybe having a larger house carries more weight to you than having a nice car then you could make do with a used car, which is often the case when buying a car with cash. It could also get you thinking and comparing other financial scenarios such as funding for retirement, getting out of credit card debt or paying for your children’s college.
Now that we’ve sort of built a case as to why paying with cash is great, let’s look into how you could actually do it.
How to pay a car with cash - here are the seven steps!
Step 1: Be realistic about what you can afford
Don’t rely on a car dealer to tell you what you can or can’t afford, because most likely almost all options would be considered expensive if you do. Dealers are more likely to persuade you into buying a car with a loan.
Only you can decide how much money is or isn’t enough. You could maybe start by assessing your total financial situation, and factor in your future financial goals as well. Each person will have different priorities in life, and make sure to identify yours.
Step 2: Get real about whether it’s a want versus a need
Just because you can afford something, doesn’t mean you should buy it.
Similar to other big decisions in life, don’t make the decision to buy a car, regardless through what medium, in a vacuum because failing to see the bigger picture or connect those dots, with other parts of your life will come with ill consequences.
Often, decisions that are made in a vacuum are made on limited perspective and information, as it fails to invite others, like your family, friends or trusted ones, to contest whatever belief you have out of fear of being judged. To a degree, your poor decision making could also be because you don’t want to be blindsided by the results of your own poor decisions.
Though always making the right decision is a tall order - from anyone - you could let the pressure off yourself by seeking a third-party perspective from outside your own bubble.
These neutral or external opinions could help give you a different perspective or look at how the payment will impact your life.
Step 3: Set up a plan and budget, and stick to it!
The biggest misstep that we often make is not preparing a budget before spending.
Setting a budget helps you do two things beyond keeping you disciplined: it creates a tangible Ringgit amount for you to work towards and helps you figure out how much you need to save each month.
With a budget, you will have a better idea of how much money you need to save or make to buy your next car with cash. By knowing what budget you are working with, you can slowly start saving and building towards that number.
But to create a comprehensive budget, you will also need to know, roughly, what type of car you are aiming for if you want to buy it with cash. Shortlist types of cars, the price range, as well as the duration it will take for you to accumulate the money needed.
Enlist family and friends to keep you on track if you end up not following your budget and plans.
Step 4: The tough part - save up the actual money!
The real hard work starts now.
This may seem like an obvious step, but it’s really one of the most important stages of purchasing a car with cash.
In order to successfully pull off your objective, you must be disciplined in setting aside money each week, bi-weekly, or monthly.
Think of it similar to investing or savings - you commit to putting away a certain amount of cash each month, either into your unit trust or mutual fund or savings account.
Be consistent and allocate a certain amount of money to put away every month. If you have more to spare that month, you could put away much more money, but if you don't have a lot of extra cash to play with, start small with at least RM100 per month - of course, you will want to accelerate this, especially if you plan to purchase the car at a certain stage of your life.
Saving money is a process that will give you a clearer picture of where your money is heading and how you could cut back on certain expenses if you needed to save more.
You could even consider investing in short-term investments like bonds in order to help grow your money.
Step 5: Find the right car
Let’s be real - if you have set your heart and mind to buying a car with cash, you’re very likely not going to be able to afford a brand new spanking sedan.
Paying a car with cash is already a huge financial commitment, so you are likely only able to focus on purchasing used cars, but with varying specs.
Our tip is to look for cars that have ‘uglied out’ or that have at least 160,000 kilometres on it because these cars will be cheaper yet still functional.
Aesthetics or cosmetics features, unfortunately, should not be your priority if you choose to buy a car with cash. Instead, dents and peeling paint will be common when buying a used car. The rougher or scuffed up its exterior looks, the higher the chances you get to haggle the seller on the price. However, contrary to popular belief, the exterior flaws do impact the car’s overall performance - though not as significantly. It may not completely affect what’s under the hood, we’ll have to say.
For example, bad or bald tires are bad news for you because it could potentially be dangerous for you to be on the road with them. If you have several hundred Ringgit to spare, do consider shelling out more to replace them, for your own safety’s sake.
If you’re wondering why 160,000 kilometres, it’s a rule inspired by car manufacturers Hyundai, Kia and Mitsubishi. We read that a car that has travelled 160,000 kilometres is not too much or near the end of its useful life because, as we read, it’s possible for vehicles made within the last 10 to 15 years to ride 200,000 miles or more if they’re properly maintained. However, we recommend you sticking to cars that have a record of routine maintenance, especially oil changes.
Step 6: Know where to look for deals
We truly hold on to the belief that you should always compare, compare and compare!
With so many options to choose from in the market, it doesn’t make sense to make your decision after just a few viewings; research every nook and cranny of the used car market in Malaysia's automotive world before you say yes to the car of your choice. Websites like Carsome, Carlist and Mudah might be helpful as a starting point.
Some of these websites will let you comb through hundreds if not thousands (and maybe even more!) of listings available in their databases. To make your experience much better, some of them like Carsome, for example, allow you to filter the inventory by car price, monthly payment, make, body type, year, mileage, transmission and colour. You can also get a 360’-view of the car, alongside a full list of car details like engine capacity and variant.
Step 7: Get your car inspected by an independent mechanic before buying
Last but certainly not least, and perhaps the most important, is to check the health of the car of your choice before you proceed with the purchase.
We’ve pretty much established in our previous article that depreciation is an unavoidable reality that all cars will experience. All cars go through this, and it’s particularly obvious with cheap and used, ‘as is’ cars. Therefore, never rely on or take the word of the salesperson about the car, whether it’s a commissioned employee, an independent seller or even your family friend (really!). Instead, get a certified, trusted and independent mechanic to kick the tires on your potential purchase.
Buying a car with cash is possible, but it may or may not be for everyone, depending on your level of discipline and commitment
As we’ve outlined in this super long article, buying a car with cash comes with definite pros, is possible and is worth the effort.
However, does it mean that you should buy a car with cash? It depends on what you are looking for and prioritising in life. Don’t buy a car with cash if you want to buy a brand new car. Similarly, you won’t be in a good position to buy a car with cash if you have no savings, to begin with. The point here is that it depends on your financial situation and goals.
We hope you found this article useful!
Whether you are a first-time or seasoned buyer, the process of buying a car can be complicated if you don’t know the industry that well. The #BreakingItDown series is all about addressing this problem. Stay tuned for more content.
By the way, if you are on the lookout for car insurance or would like to renew yours, apply through us now to stand a chance to win a Petronas gift card worth up to RM300.