Buying a car is a large commitment because of those hefty price tags, but it is a necessity for some. When you finally decide on your choice of buying a car – new or used – you have two main options when it comes to paying the price; you can fork out cash-on-hand, or purchase it with a car loan also known as a hire purchase loan).
But when it comes to getting a car loan, many (especially first-time buyers!) do not fully understand how it works. So, to make it easier for everyone to understand what car loans are all about, here is a basic guide on car loans.
What is a Car Loan?
A car loan in Malaysia is a type of loan that is taken by an individual for the sole reason of buying a car. By taking up this loan, this individual is tied down to a formal written agreement where the borrower (car buyer) is indebted to pay the loan amount plus interest to the lender (banks, financial agents, etc) over a specified period of time. If the individual fails to do so within the said period of time, it may result in the car being repossessed by the lender.
A car loan, just like any other loan is able to help you financially when you don’t have enough. Unless you have a huge amount of cash under your pillow to finance your new car, a loan can help you buy a car that you cannot afford with just cash.
Understand These Basic Car Loans Terms First
However, here are some basic car loan terms (that we have also mentioned above) to know before we dive deeper into this topic.
- Interest Rate: This is the overall cost of taking out a loan – it is the price you pay to borrow money from the bank. 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., It is usually, 10 percent% of the total cost for new cars and 20 percent% for used cars.
- Margin of Finance: The proportion of the car’s cost that the bank will lend to you. Basically, this refers to how much the bank will be financing or forking out for your car’s cost.
- Loan Period: The total amount of months or /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.
- Repossession: The lender (bank) takes away the car from a borrower when the latter fails to service the car loan installments in two consecutive months.
So, what are the Documents Required for a Car Loan?
We have laid out the general documents that you will need for a car loan application. But keep in mind that there may be additional documents required for your loan application that certain banks may require.
|Government Employees/Civil Servant||
|Private Sector Employees||
|Self Employed Individuals||
|Graduate/Young Professional Scheme||
How does a Car Loan work in Malaysia?
Generally, there are two types of car loans and the interest rate may vary as it depends on the base rate, the bank you choose and if you are getting a new car or a used car.
Two main types of car loans
- Fixed rate loans: The interest rate and monthly installments stay the same throughout the loan period.
- Variable rate loans: The interest rate is pegged against the Base Lending Rate (BLR). The BLR is a rate determined by the bank on the cost of borrowing money that will be lent out.
Banks typically provide you a margin of finance up to 90 percent, while the rest is considered as your down payment. But if you can afford it, paying a higher downpayment will lessen your principal loan amount and interest.
Another factor that might affect your installment and interest is the loan period. In Malaysia, the maximum repayment period for a car loan is nine years. The longer you stretch the repayment period, the less installment amount you’ll pay per month, though at the expense of incurring more interest over the long run.
Example: You take up a RM 70,000 car loan with an interest rate of 3.5 percent. This is how much interest may be accrued, as well as your monthly installment.
|Loan Period||3 Years||5 Years||9 Years|
Do take note that car loans with a margin of financing of 100 percent% do exist. Full loan financing is only offered only by very few lenders and for specific buyers such as first-time car buyers.
Installment and Interest Rate
The installment and interest rate that is calculated for your fixed-rate car loan, is determined by these values:
- loan amount;
- loan period; and
- the interest rate.
These are the formulas used to determine the total interest, monthly interest, and monthly installment 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)
Let’s circle back to the same example where your car loan is at RM70,000 with an interest rate of 3.5 percent and a five-year loan period. Here is how your total interest, monthly interest and monthly installment will be calculated based on the formula above.
- 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
Car Loan Calculator
Car loan interest rates in Malaysia differ according to different factors which include the brand, model, the car’s age (new or used), the financial status of the borrower, the total loan amount, the repayment period, and the borrower.
So, it is always a good idea to make comparisons between several legal and official lenders before you decide on a car loan. The easiest way to do that is by using an online car loan calculator. We’ve also made things easier for you to compare the interest rates* between nine major banks in Malaysia so you can make your choice wisely.
|Interest Rate||Minimum Monthly Repayment Amount|
|Hong Leong Bank||3.24%||
*based on individual bank’s hire purchase loan information
Check out These Helpful Tips to Get Your Car Loan Approved
Here are some things you should take note of if you don’t want your application to get rejected.
- Determine what you can afford based on your monthly income: This is the most important aspect of a car buying process. You need to know the type of car you need and how much you can afford. The rule of thumb is to only spend 15 percent of your annual income on transport expenditure.
- Check your credit score: For those with a clean credit history (zero loans and credit card payment record), the chances of your car loan being approved by the bank are very low. Therefore, you need to build a credit history for a minimum of six months by getting a credit card for starters. For those with a poor credit history, you need to rectify your repayment habit by paying your loan or credit card on time, or in full because those with a poor credit score will lower your chances of getting your car loan approved.
- Compare car loan interest rates: Since banks have different rates and terms on their car loans, it is important to research their individual interest rates. You can also apply to multiple banks and pick out the best offer.
- Get a guarantor: If your credit score is low or non-existent, you can get a guarantor to strengthen your application. The guarantor, who is typically a close relative, will assume the same risks as the borrower.
Always remember, 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, repair, road tax, insurance, parking, and travel costs such as highway tolls, among others. So, make sure you consider these costs when budgeting a car!
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