How To Calculate Your Car Loan Monthly Instalments And Interest

Taking a car loan (also known as a hire purchase loan) is the most common approach to buying a car. In this article, we will show you how it works and how to calculate your monthly payment for a conventional car loan in Malaysia.

Auto loan terms you need

Before getting to the heart of the matter, here are a few terms you should know:

  • Interest rate: The cost of taking out a loan. It depends on the base rate in effect, which can go up or down depending on the economic situation.
  • Advance payment: An initial payment which you will have to make and which covers part of the cost of the car. You will generally have to pay a minimum of 10% (new cars) or 20% (used cars).
  • Funding margin: This is the proportion of the cost of the car that the bank lends to you.
  • Loan period: This is the length of time you will have to repay your loan. Banks generally offer a loan period of up to nine years.
  • Payment: The payment you will need to make each month to clear your loan.
  • Guarantor: A surety is a person legally required to repay the loan if you cannot do so.

How do car loans work?

There are two types of auto loans: fixed rate loans and variable rate loans. A fixed rate loan means that your interest rate remains the same for the duration of the loan – this type of loan is most common in Malaysia. On the other hand, the interest rate of a variable rate loan varies according to the base rate in force. For both types of loans, your interest rate will depend on the base rate, your bank and whether you are buying a new or used car.

Your bank will generally give you a financing margin of up to 90% (new cars) or 80% (used cars). If your bank is not convinced that you can repay your loan, you may need to appoint a guarantor. This may apply if you are a newly employed new graduate or if you are a foreign citizen.

You will have to bear the rest of the cost as a deposit. It is generally a minimum of 10% (new cars) or 20% (old cars). While it may be easier for your short-term finances if you subscribe to the largest available funding margin, note that this means paying a higher monthly payment and more long-term interest payments. For example:

What is the effect of a larger deposit?

RM 55,000 auto loan, 2.5% interest rate, 5-year period
Advance payment
RM5,000
(ten%)
RM8,250
(15%)
RM11,000
(20%)
Monthly payment
RM937.50
RM876.56
RM825
Total interest
RM6,250
RM 5,843.75
RM5,500

In the example above, making a higher down payment means paying less interest. However, that doesn’t mean it’s necessarily the best option, especially if it will use up all of your savings, or if you can invest the money you didn’t spend on the deposit in a way that exceeds the rate. interest on your car loan.

Another factor that affects your payments and interest is the loan period. The longer your loan period, the smaller your monthly payment. However, you will end up paying more interest over time:

What is the effect of a longer loan period?

RM 50,000 auto loan, 2.5% interest rate
Loan period
3 years
5 years
9 years
Monthly payment
RM1.493
RM938
RM567
Total interest
RM3,750
RM6,250
RM11,250

In the example above, a longer term can mean paying a much smaller monthly payment. This can be useful if you have to limit your monthly expenses, but you will end up losing a lot more in interest payments.

Calculate your payment and interest

If you’re curious about how your fixed rate car loan payment and interest are calculated, you’ll be happy to know that the calculations are fairly straightforward. First determine these values:

  • Amount of the loan
  • Loan period (years)
  • Interest rate

Then use the following formulas to determine the total interest, the monthly interest and the monthly payment of your car loan:

Your total interest = interest rate / 100 x loan amount x loan period
Your monthly interest = total interest / (loan period x 12)
Your monthly payment = (loan amount + total interest) / (loan duration x 12)

For example, you have an auto loan amount of RM 50,000 and a five-year loan period to pay at a fixed interest rate of 2.5%:

Loan amount = 50,000
Loan duration = 5 years
Interest rate = 2.5
Your total interest = 2.5 / 100 x 50,000 x 5 = 6,250 RM
Your monthly interest = 6,250 / (5 x 12) = RM104.17
Your monthly payment = (50,000 + 6,250) / (5 x 12) = RM937.50

Don’t forget the other costs

It helps to know how much you will have to pay monthly if you are thinking of buying a car. But remember that it is not the only thing that you will pay. The true cost of owning a vehicle also includes gas, maintenance and repairs, traffic tax, insurance, parking and tolls. You will need to consider all of these costs when you are budgeting for your new car.

This article was first published in 2013 and has been updated for freshness, accuracy and completeness.

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Jothi Venkat

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