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Choosing the right car loan is a big decision that affects your budget and financial future. This guide will help you understand how to evaluate, compare, and qualify for car financing in Malaysia.

What’s A Good Interest Rate For A Car Loan?

A good interest rate on a car loan means you pay less overall. In Malaysia, interest rates vary based on whether the car is new or used. For new cars, rates typically range from 2.4% to 3.5% per year. Used car loans usually have higher rates, often between 3.5% and 4.5% per year. Islamic car loans, which follow Shariah principles, generally have profit rates from 2.5% to 3.7% per year. Your credit score and the loan period will influence the rate you get.

How Does Your Credit Score Affect Car Loan Offers?

Your credit score is very important because it tells lenders how reliable you are at paying back money. Agencies like CTOS and Experian provide credit scores in Malaysia. A higher score, generally above 650, improves your chances of getting a loan approved. It also helps you get lower interest rates, as lenders see you as less risky. With a good credit score, you might even qualify for longer loan periods or more financing. Your payment history, how much debt you have, and the length of your credit history all impact your score. You can learn how to check your CTOS credit score for free before applying for any loan by visiting our guide on How to Check Your CTOS Score.

Should You Get Financing From A Dealer Or A Bank?

You can get a car loan from the dealership or from a bank or credit union. Dealerships offer convenience because you can arrange financing and buy the car in one place. They might also have special low-interest deals for new cars. However, dealership rates can sometimes be higher due to commissions.

Banks and credit unions often provide more competitive interest rates, especially for used cars. Getting a loan from a bank beforehand means you’ll have cash ready, which can strengthen your position when negotiating the car price. It also gives you the freedom to choose any car model. It’s usually a good idea to secure pre-approval from a bank or credit union before visiting a dealership.

What’s The Difference Between New And Used Car Loan Terms?

There are some key differences when financing new versus used cars. New car loans generally have lower interest rates compared to used car loans. This is because new cars are less of a risk for lenders due to their higher value and warranty coverage. Banks might also finance a larger portion of the car’s value (up to 90%) for new cars. For used cars, the amount financed might be lower, depending on the car’s age and condition. While both can have loan periods up to 9 years, lenders might be more cautious about longer terms for older used cars due to increased risk. New car loans also tend to have a slightly higher approval rate (around 85%) compared to used car loans (around 70%).

How Much Should You Put Down?

The minimum down payment for a car loan in Malaysia is typically 10% of the car’s price. However, paying more than this is beneficial. Aiming for a 10% to 20% down payment or more can significantly help. A larger down payment means your monthly payments will be lower. You’ll also pay less interest over the life of the loan, reducing the total cost of the car. Lenders might offer better terms if you put down more money, as it shows less risk. It also helps offset how quickly cars lose value.

What Documents Do You Need To Apply?

When applying for a car loan, you’ll need several documents.

For salaried individuals, this usually includes:

• A copy of your MyKad (both front and back)
• A copy of your Driving License
• Your latest 1 to 3 months’ salary slips
• Your latest 3 months’ bank statements showing salary credits, or your latest EPF statement
• Your latest Income Tax statement (Form B/BE) with proof of payment, if applicable

For self-employed individuals or business owners, you’ll generally need:

• A copy of your MyKad (both front and back)
• Your Business Registration Certificate
• Your latest 6 months’ bank statements
• Your latest Income Tax statement (Form B/BE) with proof of payment, if applicable
• Your financial report from the previous year

Additionally, everyone will need the Sales Order or Invoice from the car dealer. Sometimes, a guarantor’s documents might be required. It’s always best to check with your chosen bank or financial institution as requirements can vary slightly.

What’s The Average Loan Term, And What’s Best for You?

When considering a car loan in Malaysia, terms typically range from 1 year (12 months) up to a maximum of 9 years (108 months). While shorter terms (e.g., 3-5 years) mean paying much less interest over time and owning your car outright sooner, they come with higher monthly payments. Conversely, longer terms (e.g., 7-9 years) offer lower monthly commitments but accrue significantly more in total interest.

The Realities of Longer Loan Terms

It’s crucial to understand the implications of opting for longer car loan terms:

• Front-Loaded Interest (Rule of 78): Many Malaysian car loans, especially longer ones, use a calculation method known as the Rule of 78. This method dictates that a larger portion of your loan’s total interest is collected by the lender in the early years of the loan. This means if you decide to settle your loan early, the interest savings will be minimal as most of it has already been factored into the initial payments, even if you pay off the principal balance. This structure prioritises the lender’s interest collection over your potential savings. It is worth noting that Bank Negara Malaysia has been working towards abolishing the Rule of 78 to ensure fairer early settlement calculations for consumers.
• Depreciation vs. Loan Balance: Cars depreciate rapidly. A new car can often lose 20% to 30% of its value in the first year alone. With a long car loan term, your car’s market value can quickly fall below your outstanding loan balance. This situation is often called being “upside down” or having “negative equity.” It means if you need to sell the car, or if it’s totaled in an accident, you could owe the bank more than the car is worth, requiring you to pay the difference out of pocket.
• Risk of Overleveraging: Vehicle loans have become a major liability for youth. Surveys show car loans are the most common debt among Malaysian youths aged between 18 – 34 years old (around 30% of youth loans), and were the second-leading cause of personal bankruptcies (14% of cases) in 2022. This highlights the significant financial risk of committing to long car loan terms, especially for younger individuals.

Evaluating and Comparing Car Financing Offers

Making an informed choice about your car loan involves carefully evaluating and comparing all offers.

Beyond the Monthly Payment: Understanding Total Cost

While a lower monthly payment might seem appealing, it’s essential to consider the total interest paid over the loan’s lifetime. A car is generally a depreciating asset, and a longer loan term simply means you’re paying more for it over a longer period while its value steadily declines.

We recommend choosing the shortest loan term you can comfortably afford, ideally 5 years or less. A 5-year loan will save you thousands in interest compared to a 9-year loan. If the monthly payments for a shorter term are too high, it might be a sign to consider a more affordable vehicle, save for a larger down payment, or explore ways to increase your income. Prioritising a quicker exit from debt aligns better with long-term financial health.

When comparing offers, think “Total Cost of Ownership,” not just the monthly payment. Before you commit, add up the estimated monthly costs of the loan payment, petrol, insurance, road tax, and maintenance. This total should not be more than 15-20% of your take-home pay. Don’t let a low monthly payment fool you into buying a car you can’t truly afford.

Key Factors to Compare in Loan Offers

The annual interest rate is crucial. A lower rate means you pay less money back to the bank. Most car loans in Malaysia use a fixed or flat interest rate. For official interest rate data, you can refer to the Bank Negara Malaysia website.

Don’t just look at the lowest monthly payment. A lower monthly payment often means a longer loan term and more interest paid in total. Always calculate the total cost of the loan (the original amount borrowed plus all the interest) to understand the full expense. 

Banks will also look at your Debt Service Ratio (DSR). This is a measure of your total monthly debt payments compared to your net monthly income. A healthy DSR (usually below 60-70%) is important for loan approval.

Remember to ask about any fees and charges, such as processing fees, stamp duty, or other hidden charges. Also, understand the terms for early settlement, in case you decide to pay off your loan sooner than planned. Some loans offer a rebate on future interest, while others might have a penalty. Crucially, before signing, ask the bank officer: “Does this loan use the Rule of 78 for early settlement calculation?” If it does, be aware that paying it off early will not save you as much as you might expect. This is especially important if you plan to sell the car before the loan ends.

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By thoroughly evaluating these factors and comparing offers from various lenders, you’ll be well-equipped to choose the car loan that best fits your budget and credit score, setting you on the road to responsible car ownership. To quickly see how different loan products stack up against each other, and find one tailored to your needs, you can use our Car Loan Comparison Tool to help you compare options.

• TAGS:
• Car Loans
• How-To