Car Loan Explained
A car loan is a personal loan that is used to buy a vehicle. It works the same way as a secured personal loan whereby the vehicle you are purchasing is securitized against the amount of money you are borrowing.
How to calculate a car loan in Malaysia?
Say you are looking to buy a Standard 2WD Proton X70, which is priced at RM109,800 (On The Road Peninsular Malaysia) at a Proton dealership.
Usually, car dealerships will have panel banks that are offering competitive interest rates. But you can also choose to submit your car loan application to any banks.
In this example, you select Maybank Hire Purchase to finance your car purchase. For the purchase of a new car, Maybank is offering up to 90% margin of finance, with you covering the remaining 10%. The interest rate is priced at 3.40% annually and you can extend the repayment period for as long as 9 years.
To illustrate further, see the car loan calculator below to see how much you are borrowing and committing every month when purchasing a new Proton X70:
|Down Payment:||RM10,980 (10% margin)|
|Applied Loan Amount:||RM98,820 (90% margin)|
|Loan Period:||9 years|
|Interest Rate:||3.40% p.a.|
|Total Interest Paid:||RM30,238.92|
|Total Loan Amount:||RM129,058.92|
At 3.40% p.a., the total interest you are paying every year is RM3,359.88, which is equivalent to RM279.99 per month.
So, if you break the monthly installment amount of RM1,194.44 down, the principal loan amount minus the interest is only RM915.
What should I look for when applying for a car loan?
There are four factors that can influence your decision making when applying for a car loan:
The cost of a loan can be cheaper when the margin of finance is lower. This is due to the fact that a loan consists of 2 parts: the principal and the interest.
The interest rate will be charged on the total applied amount for the life of the loan, whereas the principal is the total loan amount including interests that you are committing to.
Most borrowers will go for a higher margin of finance of up to 90% (sometimes 100% for first time buyer) so that they will pay less from their own pocket or savings. While this practice can save up some cash at hands, it attracts a higher interest rate if you choose a longer repayment period.
This is a common practice by the bank as an exchange for the service offered to the borrowers. Comes in the forms of percentage, an interest rate is calculated on an annual basis.
Most banks will offer a competitive car loan interest rate around 2%-6% p.a, depending on the type of car (new or used, national or foreign). You can save on the interest rate payment by reducing the repayment period or lowering the margin of finance.
This transaction happens at the point of the vehicle purchase and is usually paid by the borrower from his/her own pocket.
The larger the amount of your down payment, the lower the margin of finance you can ask from the bank. Thus, this will also lower the interest rate payment, as well as monthly installment payments.
Loan Default and Repossession
It is worth noting that a car loan is securitized against the vehicle that is being purchased. In the event of non-payment of or default on the car loan, the bank has the rights to take legal action against the borrower by repossessing the asset from them.
Subject to the terms and conditions as stated in the loan document, full ownership of the vehicle will be transferred to you when you have fully paid the car loan within the stipulated timeline.
Car Loan Approval Process
Pretty much the same as any other loan applications, car loan approval process will depend on your income, employment type, current financial commitments, debt service ratio and some other lifestyle factors.
To speed up the approval of your car loan application, you can observe these tips before or during your car purchase:
Determine what you can afford
This is the most important aspect of a car buying process: knowing the type of car you need and how much you can afford.
Before getting your hands on the dream car key, you need to calculate your debt service ratio to assess your income versus commitment. You also need to think of the maintenance aspects of car ownership such as car insurance, petrol, servicing and other incidental expenses.
Once you have determined your affordability, you can pave your way to the next step, which is checking your credit score.
Check your credit score
For those with a clean credit history (zero loan and credit card payment record), the chances of your car loan being approved by the bank is very low. Therefore, you need to build a credit history for minimum 6 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 and in full amount. As low credit score will lower your car loan approval rate, it is advisable to maintain a prompt repayment habit for up to 12 months before you next loan application.
Compare car loan interest rates
Since banks will have different rates and terms on their car loans, it is important to shop around for the best interest rate deal before signing any contract.
The easier way to compare interest rates for car loan is via online, such as banks’ website or RinggitPlus. You will be presented with a list of all banks with their rates and terms, plus you can calculate your car loan easily and apply it online.
Get a guarantor
If your credit score is too low or zero but you are in desperate need for a car, getting a person to guarantee the loan is your next best alternative.
The guarantor, who is typically a close relative, will assume the same risks as the borrower. In case the borrower is unable to pay the monthly installment, the guarantor’s name and credit will be on the line too if he/she does not step in to mitigate it.
Now that you are aware of the things you should look out for when searching for the right car loan, as well as the steps on how to calculate correctly using the car loan calculator, let's go ahead and choose a car loan that suits your preference with the comparison table below.
Car Loan Interest Rate 2023 Comparison
|Auto Financing||Interest / Profit Rate||Car Condition||Tenure Period|
|Affin Bank Conventional Hire Purchase||2.92% - 3% p.a.||New / Used||9 years|
|Maybank Hire Purchase||3.40% - 4.25% p.a.||New / Used||9 years|
|CIMB Hire Purchase-i||2.85% - 4.45% p.a.||New / Used||9 years|
|Public Bank Aitab Hire Purchase-i||3.31% - 4.10% p.a.||New / Used||7 - 9 years|
|Hong Leong Auto Loan||3.24% - 3.78% p.a.||New / Used||7 - 9 years|
|RHB Hire Purchase||3.18% p.a.||New||9 years|
|Al-Rajhi Automobile Financing-i||4.40% p.a.||New||9 years|
|AmBank Islamic Arif Hire Purchase-i||3.05% - 3.66% p.a.||New / Used||9 years|
|BSN Hire Purchase||2.55% p.a.||New||9 years|
|Bank Islam Vehicle Financing-i||3% - 3.60% p.a.||New||9 years|
|Bank Muamalat Vehicle Financing-i GradPack||3.10% p.a.||New||9 years|
|Bank Rakyat Vehicle Financing-i (An Naqlu 2)||3.30% - 3.50% p.a.||New / Used||5 - 9 years|
|KFH Automobile Ijarah-i||2.50% p.a.||New||9 years|