Affording a Car Example for Free

Published: 2021-06-26 17:05:06
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Category: Finance

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The visitation to AKPK has enhanced my knowledge towards car loan and credit card spending. Having in-depth knowledge about car loan, it allowed me to consider the factors of buying a car especially my affordability. Before considering to buy a new car or a used car, I have to look into the features, reliability and financing of the car. Calculating and estimating the monthly car installment enables me to buy a car that is affordable where the monthly installment is less than 40% of my net monthly income. This would ensure that I am able to pay for the car loan instead of running into debt. I would then also have to prepare for the expenses such as road tax, petrol, parking, toll, and others. With this, I would have to save more from other expenses such as entertainment expenses in order to pay the car expenses. Further, the visitation has given me tips on the wise use of credit card; for example, settle the outstanding balance in full. This has allowed me to spend my credit card wisely and pay the outstanding every month when I have a credit card. This is to ensure that I will not bear the cost of high late payments charges. Besides, I also get to know the different types of cards that are available and their usefulness such as charge card that imposed high late payment charges, debit card is a good option for control spending, and prepaid card has limited spending limit. This would then ensure that I would apply the appropriate card that is suitable for my condition in future. (270 words) Part B

i. Price list of Toyota Vios




Model
Price (RM)


Toyota Vios 1.5J (MT)
73,213.50


Toyota Vios 1.5J (AT)
77,313.50


Toyota Vios 1.5E (AT)
82,913.50


Toyota Vios 1.5G (AT)
88,513.50


Toyota Vios 1.5TRD Sportivo (AT)
93,213.50



(UMW Toyota Sdn Bhd, 2014) Assuming Tom is planning to buy Toyota Vios 1.5J (MT) and the price is inclusive of insurance.



Vehicle price (RM)
73,213.50


Down payment (%)
10 [RM73,213.50 x 10% = RM7,321.35]


Hire Purchase Loan amount (%)
90 [RM73,213.50 x 90% = RM65,892.15]


HP rate (% p.a.)
3


Loan tenure (years)
9 or 108 months



Total interest charged = Loan amount (RM) x Rate (%) x Years = 65,892.15 x 3 x 9 = RM17,790.88 Total loan + interest = RM65,892.15 + RM17,790.88 = RM83,683.03 Monthly installment = RM83,683.03 ÷ 108 months = RM774.84 Engagement ring monthly installment = RM10,500 ÷ 12 months = RM875 ii. Debt to Income Ratio = Net monthly salary = gross salary x (1 – EPF) x (1 – tax)




RM


Monthly salary (after EPF and marginal tax) [5,500 x (1 – 11%) x (1 – 6%)]
4,601.30


Installments



Car loan
774.84


Engagement ring
875.00


Total debt installment
1,649.84






Debt to Income Ratio (1,649.84 ÷ 4,601.30)
35.86%



Based on the calculation above, Tommy can afford to buy the car and the engagement ring. This is because his Debt to Income Ratio is 35.86% which is below 40% of AKPK recommended Debt to Income Ratio.

i. Monthly installment payment on the house loan:




Property price (RM)
550,000


Down payment (RM)
200,000


Loan amount / Margin of Finance (RM)
350,000 (550,000 – 200,000)


Loan interest (flat) %
5


Loan tenure (years)
30 or 360 months



Total interest charged = Loan amount (RM) x Rate (%) x Years = 350,000 x 5 x 30 = RM525,000 Total loan + interest = RM 350,000 + RM525,000 = RM875,000 Monthly installment = RM875,000 ÷ 360 months = RM2,430.56 ii. Debt to Income Ratio =




RM


Monthly salary (after EPF and marginal tax)
4,601.30






Installments



House loan
2,430.56


Total debt installment
2,430.56






Debt to Income Ratio (2,430.56 ÷ 4,601.30)
52.82%



Based on the calculation above, Tommy cannot afford to buy the house. This is because his Debt to Income Ratio is 52.82% which is above 40% of AKPK recommended Debt to Income Ratio.

Firstly, Laura should reduce her credit card usage. Limiting the number of credit cards she carries based on her needs and payment capability would reduce her credit card debt. She should settle her outstanding balance in full in order to save the late payment charges. If she makes only the minimum payments on her credit card outstanding, she will end up paying more money to the card issuer as compared to the original amount she paid for the products or services due to compound interest. She is also advisory to avoid using credit card if she cannot make the monthly payments as credit card costs more money if she did not use it wisely. Besides, she should continuously check her credit card monthly statements to safeguard proper transactions and charges are recorded.

Secondly, Laura has to live within her means. Spending the money on current living expenses reduces the amount she can save and invest. As her salary is not predictable, she should save for emergency funds which are equal to three to six months of her living expenses and save for irregular payments. It is better if she could have a clear understanding between her needs and wants. She is suggested to spend to meet her daily living needs instead of spending on branded clothes and products. She should smartly live below her means and save her money rather than showcase it. This can help her to save more money and put aside money for future use. Thirdly, Laura should delay gratification. It is almost impossible to escape the pressure to spend and then spend some more. The problem of Laura is that her overspending often leads her to under saving, debt accumulation and long-term financial insecurity. She should force herself to avoid negative financial influences as much as possible. This means she is supposed to change her behavior on penchant for the high life. In her condition, she can move to a place that have charges lower rental in order to save from the rental. Furthermore, Laura should borrow in a responsible manner. Instead of borrowing from friends and relatives, she can try to increase her passive income and find part-time job to settle her debt. Further, when she borrows, she has to keep in mind that she should borrow to meet her needs and not her wants and should borrow within her means. It is advisory that she borrows an amount that she can pay back comfortably. It is recommended that the total monthly repayments should not exceed 40% of her net monthly income. She should also bear in mind that her creditworthiness will be affected if she do not repay her loans according to the terms of repayment. Lastly, Laura should develop good financial management habits, with regular check-ups of her cash flow and net worth. She is not advised to buy the VolksWagon Jetta as buying a new car is an unproductive debt. This is because it is a funding for Laura's lifestyle wants and does not generate income for Laura; it is a debt for her instead. As her salary varies, she is hardly to pay for the monthly car loan installments and the down payment. She should also take into consideration of all commitments and unexpected expenses. Buying the car incurs costs including insurance, road tax, petrol and other costs. Additionally, the new car depreciation is high where it is at least 10% in the first year (AKPK, 2014). Thus, losses are higher on resale and it has higher financing costs over the tenure. As she already has a car, it is not practical to purchase the new car.

Tommy should not act as a guarantor to Laura's car loan. There is a high chance that Laura could default her payments as her salary is not fixed. She may suddenly find that she cannot meet the terms and conditions of the credit contract because of employment or any other reasons. This could potentially leave Tommy in need of debt help. Further, Laura's spending behavior is not controlled and she has a penchant for the high life and often vies branded clothes and products. For this reason, Tommy should never act as a guarantor unless he is able to afford the repayments. However, as Tommy is going to buy a Toyota Vios and a house, acting as a guarantor would increase his burden if Laura did not manage to pay her debt.

Additionally, Tommy should consider the reason behind why Laura needs a guarantor to take the loan. Laura poor credit history and creditworthiness is the main reason bank wants a security because they are not prepared to take the risk of lending the money itself. Laura only pays the minimum monthly payments and bears the late charges. In this situation, being a guarantor can ruin Tommy's credit rating and may put his own financial situation in danger. The presence of a new loan on Tommy's credit profile reduces his average length of credit history and this also hurts his score. Besides, Tommy should also consider his relationship with Laura. Laura is only Tommy's girlfriend in current situation and they have not got married yet. There is a chance that they have a major fall out and no longer wish to be associated with each other. Their relationship could have ended but the loan commitment is still tied up. Laura sometimes could even borrowed money from her friends and relatives to pay her credit card debts without Tommy's knowledge. This shows that Laura is not able to manage her debt and she is not honest to Tommy. Therefore, Tommy should not act as Laura's guarantor for the car loan. He should takes into account Laura salary, credit history and their relationship. When Tommy agree to become a guarantor, he is liable for the unpaid portion of the hire purchase financing and the interest due if Laura default on her repayment. If Tommy fails to pay the debt, the creditor can take possession of the property Tommy has listed as security for the debt. This could put Tommy into financial problem and may leads to bankruptcy if he has too much loan and unable to pay for it.

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