Bad debt versus good debt
aHOUSE or car — which is a more sensible first investment?
While this depends on immediate financial circumstances of the individual involved, most people would advise buying a house first.
Everyone knows a car is a depreciating asset. Unless you’re buying a limited edition or vintage car, there is no chance anyone would pay you more than your initial investment.
A house, on the other hand, is an appreciating asset. If you research a house rigorously enough, not just on the developer but also the surrounding areas as well as infrastructure plans, then you can choose a location that’ll help you make a profit in the future.
Other factors to consider are nearby roads and highways, convenience, parking and nearby developments.
What you must know is, if you decide to buy a car first, its loan payment may prevent you from qualifying for a mortgage.
Lenders want to see that you have enough income to keep up with the monthly expense associated with owning a home. So the first thing they consider is how much of your monthly income goes towards your car and how much you can afford for housing.
Datuk NK Tong, managing director for Bukit Kiara Properties Sdn Bhd (BKP), said property would always have a higher resale value versus a car of which value would depreciate over time.
“According to money expert David Bach, nothing you will do in your lifetime realistically will waste more money than buying a new car. When you buy a car and drive out of the showroom, its value will drop 10 to 20 per cent. By the end of the first year, the car’s value would have dropped by 30 per cent or more. In the fifth year, it can lose up to 60 per cent of its value. Let’s say you buy a car that is RM100,000, after five years if you want to sell you may only get RM40,000.
“When you buy a house, you can be assured that the price will appreciate. If you bought an apartment for RM100,000, five or eight years later the price would surely have doubled, and there is a lot you can do with the money if you decide to sell it,” Tong told NST Property.
He said the simple rule is if the asset increases your net worth or has future value, it is good debt.
Tong said if the asset doesn’t do that and the borrower doesn’t have cash to pay for it, then it is bad debt.
“Would you prefer to get a loan for an item such as a car that depreciates over a short period and is deemed as ‘bad debt’ or commit to a ‘good debt’, which is to purchase a house or asset that will appreciate in the long term?” he asked.