Are Pricier Cars Leading To A Bankruptcy Bubble Among Young Malaysians?

It might be a tough reality to face, especially if you’re an enthusiast (at any level, really): are the cars we buy causing our financial downfall and keeping Malaysians forever in the red?

Financial literacy is something that most take years to acquire, and even this is the result of longer-term experience that helps us avoid our past mistakes. After all, it’s not like we’re taught about any of this in schools.

In most cases, it’s things like exorbitant spending beyond our means, whether impulsively all at once or boxing yourself into a long-term agreement.

Buyer Beware

Indeed, apart from homeownership, our cars rank pretty highly on the list of common major financial commitments we undertake in our lives, especially due to our tendency to rely on borrowed money to obtain them.

In fact, from the perspective of recurring commitments, we tend to cycle through cars many more times than we do homes, therefore jumping from one hire purchase loan to the next. It’s no wonder that many financial ‘experts’ (most commonly the purported or self-styled ones) label it as a less-than-prudent choice.

Still, besides the need for vehicular mobility in everyday life, we’re only human and have our own wants and desires. Should we see a car we like, and we’re at our discretion to buy it over the one that merely fulfills our basic transport needs, we tend to want to sign on the dotted line.

It takes some strong will to turn away from the Proton X50 Flagship that you can technically afford and instead settle for a Perodua Axia E (MT) that’ll get you from A to B just as effectively.

Between the years 2013 and 2017 alone, a little over 100,000 Malaysians had declared bankruptcy with 60% of them aged between 18 and 44 years old, according to the Malaysian Statistical Handbook 2018.

During that time, car sales numbers in Malaysia had their ups and downs but stayed fairly consistent between 550,000 and 600,000 new vehicles sold. Delving a little deeper revealed a consistent increase in demand (and therefore, sales) for pricier cars from more upmarket brands such as Mercedes-Benz, BMW, Audi, and Porsche in both new showroom and pre-owned variety.

Malaysians Won't Settle For Less

Also during this period, Mazda had also seen considerable success in the market as they peddled cars that toed the line between mass market and prestige. Were Malaysians under 50, for some reason, more drawn to spending their hard earned Ringgits on cars they did not need and couldn’t necessarily (or comfortably…) afford?

Supporting this assertion is a report by the country’s Insolvency Department (MDI) that stated that, by December 2018, they were 303,415 bankruptcy cases being handled in total. Of the leading causes stated by the Insolvency Director-General Datuk Anas Ahmad Zakie, hire purchase loans for vehicles ranked 2nd at 24.73%, just behind personal loans in the top spot accounting for 27.76% of bankruptcies.

Under Prime Minister Najib Razak in 2016, in addition to revising the Bankruptcy Act, the government helped implement more stringent hire purchase approval criteria to help curb the high count of defaulters.

However, that did not seem to help the situation too greatly, prompting the Finance Minister at the time, Lim Guan Eng, to publicly address the problem of low financial literacy among the Malaysian youth.

In 2019, the widely criticised Belanjawanku guidelines were published by the Employers Provident Fund (EPF), which sought to provide the Rakyat with a framework from which to plan our financial lives and form/ follow prudent monthly budgets while setting money aside for rainy days and long-term savings.

Without getting bogged down in too many details and for the sake of relevance, it basically allocated 17% of our monthly expenditures for ‘Transport’, under which both public transportation and personal vehicles (including fuel) could fall.

Unrealistic Expectations

They had posited a median income for a young, unmarried adult individual at roughly RM2,500 to RM3,300, meaning they had between RM561 and RM770 to spend on a car should that be their only viable solution, along with running costs, maintenance, and toll charges. That isn’t much, even 6 years ago, especially for someone living in the Klang Valley, when the median household income was just RM3,313 as published by Malaysia’s Department of Statistics.

Today, in 2022, things haven’t exactly improved with Malaysia exhibiting marginal increases in mean wages relative to the rate of inflation. Cars have only gotten more expensive and have trended toward larger models, which carry a higher price tag by default.

One need only look to Proton and Perodua for proof with the former automaker’s top 2 models being costing above RM90,000 and the latter’s introduction of the Ativa that, while it is their largest vehicle to date, carries a higher base price than any previous model.

We’re not entirely blameless either, demanding more complexity under the guise of ‘value’ and groan in disapproval when an automaker omits advanced (usually active) safety features, insists on a multitude of connectivity options, remote telematics, satellite navigation, wireless charging, a fancy speaker setup, and even prioritise a sunroof that will probably never be used.

The ‘good news’ - said with utmost sarcasm - is that Malaysia’s Insolvency Department (MDI) has reported a steady decline in the number of bankruptcy cases since 2019 thanks to various government measures and despite the disruptive force of COVID-19.

In 2021, only 6,554 cases were declared compared to 12,051 cases in 2019. Seems like a good thing, right?

A Blind Eye?

But this outcome has been tampered with seeing how, amidst the pandemic, the MDI had raised the minimum debt threshold for the presentation of a bankruptcy petition to RM100,000, double the RM50,000 that it stood at previously after 2017. Prior to that, it was just RM30,000.

This ‘temporary measure’ remained in force until August 31st, 2021, but was almost immediately implemented into long-term policy via an amendment to the Insolvency Act 1967. The goal post for bankruptcy keeps being moved further back, effectively meaning that one would have to be in more than triple (3x) the amount of debt to be eligible for bankruptcy status from 2020 and beyond compared to 2016. That’s nuts, borderline scandalous.

No wonder the MDI kept declaring the lower and lower bankruptcies over the past few years despite an economic recession in 2020, a sagging unemployment rate, a higher cost of living, and only marginal increases in median Malaysian spending power.

Loan moratoriums, various EPF special withdrawal schemes, and other government aid programs have helped take some of the sting out of the worst chapters of the pandemic, but perhaps among the most ill-advised, impulsive move to be made from this financial reprieve is to spend it on that unnecessary new car in time for the first in-person Hari Raya we've enjoyed in 2 years.

We wonder what the MDI will publish about bankruptcies in 2022, or will it be swept under the rug by another deflection, increasing the threshold yet again.