Did you know that there’s more than one type of auto loan available in the market? Most of us are on the conventional fixed rate loan, where the interest rate, along with the monthly instalment, is fixed throughout the tenure. Whatever happens to the base lending rate (BLR) during the loan tenure will not affect your car loan repayment. It’s simple and straightforward.
If you’re a homeowner, you’d know of another type of loan. There are fixed rate mortgage plans around, but yours is likely to be a ‘flexi’ variable rate loan. You’d also know that the interest rate for your home loan can go up or down, depending on Bank Negara Malaysia’s periodic decisions to increase or lower the BLR according to economic conditions.
Yes, there’s less certainty with the variable rate loan when it comes to monthly instalments, but interest is calculated using the reducing balance method and one can potentially save a significant amount on total interest paid, versus a fixed rate loan. Pay more, pay faster, pay less overall. Did you know that you can also choose a variable rate loan for your car?
As mentioned, like your mortgage, a variable rate auto loan will see its interest rate fluctuate according to the BLR – and this is seen as a negative thing by many. However, bear in mind that auto loans are typically much smaller in amount compared to home loans, and we might not be looking at huge differences in monthly payments should the BLR go up by say, 0.25 to 0.5 percentage points.
The biggest benefit of a variable rate loan is the reducing balance way of calculating interest, so every extra ringgit you pay works towards reducing the principal balance, while shortening the loan tenure. And this is counted on a daily basis too. Received a bonus and don’t want to spend it? Deposit a lump sum into your car loan for principal reduction to further slash the tenure and interest.
In contrast, there’s no benefit in paying extra in a conventional fixed rate auto loan – the total interest you have to pay is fixed, and there might even be a penalty for settling the loan early! Based on RHB Bank’s illustration of potential savings with its variable rate ‘Vehicle Financing-i’ auto loan above – just by paying an extra RM84 per month, one gets to save RM1,818 in interest, shortening the tenure by nine months in the process.
Typically, a variable rate car loan’s interest rate is displayed as ‘BR +0.XX%’, with the bank’s base rate (BR) tracking BNM’s BLR – home loan style. In RHB Bank’s case, that main interest rate figure is tagged with a fixed rate loan equivalent for better comparison – for instance, the Green Financing Rate for plug-in hybrids and EVs is currently at BR +0.19% p.a. (RHB’s BR is 3.75%), which is equivalent to a fixed rate loan interest of 2.10% p.a.
If you noticed that 2.1% is lower than the typical going rate for fixed rate loans, that’s because the latter is usually priced based on the bank’s market forecast, and any potential future increase in the BLR would have already been factored into the rate being offered upfront as the bank secures its future profits today.
There’s also something about fixed rate loans many don’t know about. This so-called Rule of 78 used by banks in Malaysia front-loads the interest in the earlier period of the loan, progressively reducing it towards the end of the tenure.
This is beneficial for the lender as it gets its profits early, but not so much for the borrower – sell your car after two or three years and you might be shocked that ‘so little has been paid off’ and the settlement amount is still high. That’s because a huge chunk of what you’ve been paying so far is merely the interest.
In conclusion, there’s nothing wrong about fixed rate car loans, as they offer simplicity and assurance. But if you want more control over your finances and fancy savings in both interest rates and tenure, variable rate loans offer more flexibility – the ‘pay more, pay less’ nature of it means you can put extra funds to good use by reducing your loan’s principal balance. No exit fees on early settlement, too.
Looking at RHB Bank’s variable rate auto loans, there’s a Green Financing Rate for PHEVs and EVs with financing amount of up to RM500,000. The interest rate is BR +0.19% p.a., which is equivalent to a 2.10% p.a. fixed rate loan. There’s also a Volvo Car Finance Package offering BR +0.01% p.a. (2% p.a. fixed rate equivalent) for up to 90% financing and up to nine years tenure.
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