What Determines Your Car Loan Instalments And Interest Payments?

What Determines Your Car Loan Instalments And Interest Payments?

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

Car loan terms you need know

Before we get into it, here are a few terms you need to know:

  • Interest rate: The cost of taking out a loan. This depends on the prevailing Base Rate, which can go up or down depending on how the economy is doing.
  • Down payment: An upfront payment that you’ll need to make that covers part of the cost of the car. You’ll typically need to pay a minimum of 10% (new cars) or 20% (used cars).
  • Margin of finance: This refers to the proportion of the car’s cost that the bank will lend to you.
  • Loan period: This is the length of time that you’ll have to pay off your loan. Banks usually offer a loan period of up to nine years.
  • Instalment: The payment you will need to make every month to clear your loan.
  • Guarantor: A guarantor is someone who is legally bound to repay the loan if you are unable to.

How do car loans work?

There are two types of car loans – fixed rate loans and variable rate loans. A fixed rate loan means that your interest rate stays the same throughout the loan period – this type of loan is the most common in Malaysia. On the other hand, the interest rate for a variable rate loan fluctuates according to the prevailing Base Rate. 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 typically give you a margin of finance of up to 90% (new cars) or 80% (used cars). If your bank isn’t confident that you can repay your loan, you may have to appoint a guarantor. This may apply if you are a fresh graduate who is newly employed, or if you are a foreign citizen.

You’ll have to bear the rest of the cost as a down payment. It’s usually a minimum of 10% (new cars) or 20% (old cars). While it can be easier on your short-term finances if you take out the largest margin of finance available, do note that this will mean paying a higher monthly instalment, and more in interest payments in the long run. For example:

What is the effect of a larger down payment?

RM55,000 car loan, 2.5% interest rate, 5-year period
Down payment
Monthly instalment
Total interest

In the example above, making a bigger down payment means paying less interest. However, this doesn’t mean that it’s necessarily the better option, especially if it will deplete all your savings, or if you can invest the money you did not spend on the down payment in a way that outpaces your car loan’s interest rate.

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

What is the effect of a longer loan period?

RM50,000 car loan, 2.5% interest rate
Loan period
3 years
5 years
9 years
Monthly instalment
Total interest

In the example above, a longer tenure can mean paying a much smaller monthly instalment. This can be useful if you need to limit your monthly expenses, but you’ll end up forking out much more in interest payments.

Calculate your instalment and interest

If you’re curious how the instalment and interest of your fixed-rate car loan is calculated, you’ll be glad to know that the maths is quite straightforward. First, determine these values:

  • Loan amount
  • Loan period (years)
  • Interest rate

Then, use the following formulas to determine the total interest, monthly interest and monthly instalment 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 instalment = (loan amount + total interest) / (loan period x 12)

For example, you have a car loan amount of RM50,000 and a loan period of five years to be paid at a flat interest rate of 2.5%:

Loan amount = 50,000
Loan period = 5 years
Interest rate = 2.5
Your total interest = 2.5/100 x 50,000 x 5 = RM6,250
Your monthly interest = 6,250 / (5 x 12) = RM104.17
Your monthly instalment = (50,000 + 6,250) / (5 x 12) = RM937.50

Don’t forget the other costs

Knowing how much you may have to pay in monthly is useful if you’re thinking of getting a car. But don’t forget that it’s not the only thing you’ll pay. The true cost of vehicle ownership also includes petrol, maintenance and repair, road tax, insurance, parking and toll costs. You’ll need to account for all these costs when you budget for your new car.

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

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