Are you ready to buy a car? Well, if you’re planning on taking out a loan to finance that purchase, there’s a thing or two you need to know about car loans. Read on for an in-depth look at this very necessary loan product.
You’ve got your licence to drive and now you’re looking for the right car to take you from Point A to Point B and everywhere in between, but did you consider how you’ll pay for it?
Since most people don’t have large stores of cash just lying around, this purchase is usually made with the help of car loans. Before taking one out though, it’s time to get familiar with car loans, here’s our top on 5 on what you need to know.
1. Interest Rates
Interest rates apply to all types of loans and naturally car loans are no exception. The rates set for car loans are partly based on 2 main vehicle-related factors, firstly, if it is a national or foreign-made (brand) and second, if it is a new or used car. In general, national and second-hand cars have higher interest rates.
Of course, these are not the only elements that come into play with interest rates. Loan amount and tenure, reference rates, borrower’s credit history and status, as well as bank-dealer pacts and promotions are significant determinants as well.
Most people opt for fixed interest rate loans by which a flat rate is paid off every month. But, do note that these loan types mean that interests are being calculated on the principal and not it’s reducing balance.
In other words, you could be paying more in interest if compared to flexible rate loans. Nevertheless, if you are the type who has difficulty with making less structured payments, caution is warranted for undertaking flexi car loans.
2. Down-payments and Margin of Financing
It’s a good idea to put a down-payment for the loan if you’re able as you’ll benefit from borrowing a smaller amount, and thereby paying less in total interest costs.
Consider though that per annum interests are usually lower for larger sums borrowed (within a specified range) but you’re still paying more in overall interest.
If you don’t have the funds or prefer to invest your down-payment elsewhere, you might be able to obtain a 100% margin of financing if eligible for special loan schemes. Otherwise, the regular requirement for car loans is a minimum 10% down payment for new cars and 20% for used cars.
3. Guarantors and Collateral
While some banks do require a guarantor, others do not. If you’re not too confident with your financial situation, it might better to find a guarantor to help get your loan approved and possibly even, obtain better rates.
Most banks won't require a guarantor as your car loan is technically backed by collateral: that is the car you are purchasing. Should you default, they will repossess your car.
That said however, in such bad economic times, banks realise that cars depreciate over time and bad maintenance could render the car almost worthless. To safeguard their interests, a guarantor is still required.
4. Loan Tenure, Repayments and Early Settlement
How much time do you need to pay off this loan? Well, this is where loan calculator tools come in handy to help you run repayment simulations and assist in figuring out a suitable time-frame to settle the loan.
In Malaysia, you may take out a car loan for a minimum of 1 year to a maximum of 9 years. Depending on your loan amount and interest rate employed, your monthly repayments will be bigger for shorter-tenured loans.
Depending on the type of loan undertaken, you may save money with early settlement. If you’re on a fixed rate however, careful calculations are needed to make sure your rebate (if any) is justified. Banks in Malaysia do practice the Rule of 78. To find out more about that, check out the handy guide on our sister site, Savemoney.
5. Insurance and Road Tax
It’s compulsory to purchase insurance and road tax for your car, thus you should remember to include this amount so you’ll have no surprises in terms of how much you’ll need to borrow or make in down payment.
Insurance payments are usually much higher than road tax payments but you can use our car insurance calculator to help you estimate premiums.
You will often find that the bank giving you the car loan will arrange insurance for you with their selected insurers so if you want to find one of your own, do ask them if it will be possible.
Tip: Banks usually hold on to car grants until the end of the loan repayment tenure but did you know you could ask to get it back earlier? Most banks will allow you to retrieve your car grant after the first year of full and precise repayment (but do confirm this with your bank!).
You can then use the grant to obtain a different insurance plan or get road tax done yourself sans runner fees by the bank.
Getting the Best Deal
When taking out a car loan, remember that this is a highly competitive area and thus the ball may be in your court. This is of course provided that you meet all the lending criteria (adequate salary, good credit standing).
What you’ll need to do is engage both the dealer and bank for the best deal possible. How would you go about doing this? Well, from the dealer, you’ll want the lowest possible price on the car and also to benefit from any special arrangements, the dealer may have with the bank.
Then for your car loan needs, take advantage of our ultimate car loan calculator to help you find the loan with the lowest interest rate. Apply to one or more banks to see which one gives you the best offer, then compare away.