Sunday, September 26, 2010

Making Use of NCD for Your First Car?

For those of you who have purchased car, you usually won't know about NCD (i.e. No Claim Discount or NCB or No Claim Bonus) until you plan to sell your car or buying a new car. Your car agent will usually tells you about this NCD/NCB and how you could make use of it.

Well, this post is not really just talking about NCD but whether you should make use of the NCD for your first car purchase. It may be a smart move, but is it? Let’s check it out…

What is No Claim Discount (NCD)? 

NCD is a discount given to the car insurance policy holders when they want to renew their car insurance. If no claim is made (e.g. due to the accident) for a certain period of time (based on the table below), you will get discount in terms of % for the premium that you should pay.

Beginning of Private Vehicle Motorcycle Commercial Vehicle
1st Year 0% 0% 0%
2nd Year 25% 15% 15%
3rd Year 30% 20% 20%
4th Year 38.33% 25% 25%
5th Year 45% 25% 25%
6th Year 55% 25% 25%
Note: This table applicable to Malaysia automobile insurance only.

For example, your insurance is $1K and after a year (2nd year) and you do not claim it, you will entitled for 25% discount. That means you only need to pay $75 for the second years. This applies to the subsequent years. Please also note that the discount is different for private and commercial vehicles and motorcycle as well.

Buy Your First Car to make use of NCD?

If you’re one of the smarter people, you probably already have an idea to make use of this NCD because the NCD can be transferred to your second new car. So, what you do is to buy your first car “as cheap as possible”. That could be the second hand  or used car. The cheapest the better because your 1st year has no discount at all. You buy the second hand car and use it for 6 years (depends on how much discount you want) and sell it later on to purchase your second car. You are then entitled the 55% discount of the insurance premium for your second dream car.

Don’t get it? For simplification, let’s assume your insurance premium is the 5% of your call value and see the following example:

(1) Purchase your first car as cheap as possible:
  • First Car Value: $10,000
  • Premium: $10,000 X 5% = $500
  • First Year Payment: $500
  • Second Year Payment: $500 X 75% = $375
  • The subsequent years: <do your own math>
(2) Sell your first car and purchase your dream car, transfer your NCD to the new car:
  • First Car Value: $100,000
  • Premium: $10,0000 X 5% = $5000
  • First Year Payment: $5000 X 55% = $2250 (You save by 55% – explained below)
  • Second Year Payment: $500 X 55% = $2250 (You save by 30% – explained below)
  • The subsequent years: <do your own math especially your NCD is not at maximum yet>
Note: For a very accurate premium calculation, you can talk to your insurance company or you can refer to this car insurance calculator from Kurnia here. - (Malaysia only)

So what does this tell you? This tells you that by making this smart move, assuming you purchase your second car directly without any NCD, you save up to 55% for your first year and 30% (55%-25%) for your second year and so on. So the smart move is really:

“Buy Your First Car as Cheap as Possible and Use It for 6 Years Before You Buy Your Dream Car”
Is this really a smart move?

Everything comes with a price, you buy a cheap stuff and what is the trade-off? No trade-off? Are you sure? Yes, there is a risk and the risk is the maintenance of your first car. However, there are people saying that the maintenance cost is way lower than the insurance premium if you buy your dream car directly. Well not really, it all depends on how high your maintenance cost right?

The maintenance cost is really depending on how well you understand your car. Huh? Yes, how much you understand your own car. Let’s share my own experience here. I used to have an old car (i.e. > 10 years old) and every time I went to service, averagely it costed me around RM500 and sometimes even more if changing parts was required. I then passed this car to my dad to use. Surprisingly, the average maintenance cost now is less than RM 200 for every services. How could this happen?

This is because my dad “KNOW EXACTLY” what the car needs and don’t need. He knows the car well and able to negotiate with the mechanic and go into technical when possible. Do you need to change the parts if you can fix it? Why can’t you fix it rather than changing parts? Is it because you’re lacking of skills? Do we need to change break oil that often? Well, there are just too many things. The sad thing is nowadays you hardly find any honest reliable mechanic out there. Everyone now is just too money oriented.

Now, back to the question is making use of NCD to buy your first cheap car is a smart move? Yes, only if you can make sure you do not blow up your maintenance cost of your first baby. But how? Let’s see the list if that make sense to you:
  • Make sure the car is really low maintenance (get someone who knows car to evaluate the car that you want to buy). You need to make sure it can last for 6 years too if you want to get the 55% discount.
  • Has a very reliable and trusted mechanic who won’t simply drain out your money (hardly find nowadays – probably only those in the village or “kampung”).  
  • You’ve knowledge on car (mechanical parts), you know what exactly is needed or not needed for your car. In the workshop, you usually instruct them what to do and you pay for their services to do that. As a matter of fact, some mechanics become reliable and trusted only when they know you know exactly what they’re doing. Well, this is our world...
If you’re scare of taking the risk, then you don’t need to buy a very cheap car (e.g. used for 15 years). You can buy the 5 years old car for example. It will still save you some money. Good luck. Now you know this tip, would you ever consider this smart move?


Alvin said...

gosh...i just realized i am clueless about this and still clueless after reading it =_=

why the dream car's 2nd year is $500 ? :T

ChampDog said...

That means this article is a failure. lol. :) What exactly you're clueless here?

That is a typo actually, good catch! It is $5000 not $500. This is just an example of using 5% as the premium that we need to pay. You can check it out the "kurnia" website for exactly how much we need to pay.

The key thing is you will get maximum of 55% discount if you transfer your NCD from your first car which you bought it cheap.

kampunginvestor said...

Cleared some of my doubts! Thanks.. ^^

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