We received an email from Tracy who decided to buy a Proton saga but in dilemma either to pay it with cash or go for a short term loan. Here is her message to us.

“Dear Angelina, I read two articles in Malaysiaminilover, one is regarding tips to buy a Proton Saga and another one is smart or stupid to buy car with cash in Malaysia. Both articles help me a lot but I am still in dilemma. I am about to buy a used Proton Saga with the price tag RM25,000. I enquire several banks and the best loan interest rates I can get is 3.8%. Can you please give me an advice is it wise to buy it with cash or loan it for a year?”

In order to give you a better explanation, let us back up a little bit. Generally, there are only three situations: The loan rates are equal with the ROI (Return On Investment) rates on the cash you have, or the loan rates are higher than the ROI rates, or the ROI rates is higher than loan rates. The ROI rates here means the percentage of what you will earn if you put this money in either bank, stock market, or some other investment funds. Here we made several calculations to show the exact figure by estimating the car value will depreciates to RM22,000 after a year.

If you pay the car with cash

• Cash paid for car: RM25,000
• Cost for car loan: RM0
• Earning lost on cash: RM0
• Monthly car payment: RM0
• Cash on hand after a year: RM22,000

If loan rates = ROI rates

• Cash paid for car: RM0
• Cost for car loan: RM25,000 * 4% * 1 year = RM1,000
• Earning on cash: RM25,000 * 4% * 1 year = RM1,000
• Monthly car payment: RM2166
• Cash on hand after a year: RM22,000

When both of the rates are equal, does it sounds like you are borrowing your own money through the bank? It is not recommended to take a loan in this case because the process to obtain a loan involves many other costs like processing fees, document fees, and stamp duty cost.

If loan rates > ROI rates

• Cash paid for car: RM0
• Cost for car loan: RM25,000 * 4.5% * 1 year = RM1,125
• Earning on cash: RM25,000 * 4% * 1 year = RM1,000
• Monthly car payment: RM2177
• Cash on hand after a year: RM22,000 + RM1,000 – RM1,125 = RM21,875

If what you going to spend is more than what you can earn, it is not a wise decision too.

If loan rates < ROI rates

• Cash paid for car: RM0
• Cost for car loan: RM25,000 * 3.8% * 1 year = RM950
• Earning on cash: RM25,000 * 4% * 1 year = RM1,000
• Monthly car payment: RM2162.50
• Cash on hand after a year: RM22,000 + RM1,000 – RM950 = RM22,050

Is it really worth to go through all the hassle processes and just save an extra RM50 in a year? The answer is no. However, if there is a higher return rate above 6% it may worth to consider. 6% ROI on RM25,000 is RM1,500 and the earning will be RM500 a year in this case.

Think whether the cash will be needed in near future. If the cash is just small part of what you have, buying a car with cash will be wiser.