When you buy a car, new or used, unless you have some cash saved up to pay off your car, the most common way is buying it via a car loan (or also known as a hire purchase loan). In Malaysia, it would be extremely convenient to have your own car to move around. But when it comes to getting a car loan, many do not fully understand how to calculate car loans and interests. But before we delve deeper into that, here are some basic terms you should know.
Car Loans Terms
- Interest Rate: It is the overall cost of taking out a loan. It depends on the base rate that is provided by the bank, which can go up and down depending on the country’s economy.
- Down Payment: The upfront payment for the car that covers part of the cost, usually, 10% of the total cost for new cars and 20% for used cars.
- Margin of Finance: The proportion of the car’s cost that the bank will lend to you.
- Loan Period: The total amount of months/years taken to pay off your loan.
- Installment: The amount that you need to pay monthly to the bank to clear off your loan.
- Guarantor: Someone who is bound legally to pay off your loan if you are not able to do it.
How Does A Car Loan Work?
Generally, there are two types of car loans and both these loans’ interest rate depends on the base rate, the bank you choose and if you are getting a new car or a used car.
- Fixed rate loans – interest rate stays the same throughout the loan period.
- Variable rate loans – interest rate fluctuates according to the current Base Rate.
Banks typically provide you a margin of finance up to 90% and the rest, would be paid via down payment by you. While it is easier for your short-term finances if you take out the largest margin of finance available, this also means you would be paying higher monthly installment and in the long run, a higher interest.
Another factor that might affect your installment and interest is the loan period. The longer the loan period, the smaller your monthly installment would be, but you would end up paying more in interest.
Example: A RM 70,000 car loan with an interest rate of 3.5%.
|Monthly Installment||RM 2,148.61 (3 Years)||RM 1,370.83 (5 Years)||RM 852.31 (9 Years)|
|Total Interest||RM 7,350||RM 12,250||RM 22,050|
Instalment and Interest Rate
To know how the instalment and interest rate is calculated for your fixed rate car loan, its kind of straightforward and all you need is to determine these values:
- Loan Amount
- Loan Period
- Interest Rate
These are the formulas used to determine the total interest, monthly interest, and monthly instalment for your loan.
Your total interest = interest rate/100 x loan amount x loan period
Your monthly interest = total interest / (loan period x 12)
Your monthly instalment = (loan amount + total interest) / (loan period x 12)
Using back the above example: A RM 70,000 car loan with an interest rate of 3.5% with a 5-year loan period.
Total Interest: 3.5% x RM 70,000 x 5 = RM 12,250
Monthly Interest = RM 12,250/ (5×12) = RM 204.16
Monthly Installment = (RM 70,000 + RM 12,250) / (5×12) = RM 1370.83
But when it comes to getting a car, you should also take into consideration all the other costs that might come up along the way. These costs include petrol, maintenance and repair, road tax, insurance, parking, and toll cost, among others. So do consider these costs when you are coming out with a budget for a new car. You can also check out Carsome‘s huge range of used quality cars if you want to cut some cost from your total budget.