Car loans don’t have to have a fixed rate—like your mortgage, an adjustable-rate loan offers flexibility and potential savings.

Did you know that there is more than one type of car loan available in the market? Most of us use a conventional fixed-rate loan, where the interest rate along with the monthly payment is fixed throughout the term. Whatever happens to the Base Lending Rate (BLR) over the life of the loan, it will not affect your car loan repayments. It’s simple and clear.

If you’re a homeowner, you know about another type of loan. There are fixed-rate mortgage plans, but yours will likely be a flexible-rate loan. You are also aware that the interest rate on your home loan may increase or decrease depending on Bank Negara Malaysia’s periodic decisions to increase or decrease the BLR depending on economic conditions.

Yes, with an adjustable rate loan there is less certainty when it comes to monthly payments, but interest is calculated using the decreasing balance method and you can potentially save a significant amount on the total interest rate paid compared to a fixed rate loan. Pay more, pay faster, pay less overall. Did you know that you can also choose an adjustable rate loan for your car?

Comparison of RHB Bank variable and fixed rate car loans – click to enlarge

As mentioned, just like with a mortgage, the interest rate on a variable rate car loan will fluctuate depending on the BLR – and many see this as a negative. However, keep in mind that car loan amounts are typically much smaller compared to mortgages, and we might not see a huge difference in monthly payments if the BLR rose by, say, 0.25 to 0.5 percentage points.

The biggest benefit of an adjustable rate loan is the way interest is calculated as the balance decreases, so every extra ringgit you pay helps reduce your principal balance while shortening the loan term. And this is also counted daily. Received a bonus and don’t want to spend it? Pay a lump sum towards your car loan to reduce the loan principal to further reduce your tenure and interest.

In contrast, there is no benefit to paying extra on a regular fixed-rate car loan—the total amount of interest you have to pay is fixed, and there may even be a penalty for paying off the loan early! Based on the illustration above of RHB Bank’s potential savings with its variable rate ‘Vehicle Financing-i’ car loan – by simply paying an extra RM84 per month, you can save RM1,818 in interest, while reducing your tenure by nine months. .

Potential Interest Savings by Increasing Monthly Payments – Click to Enlarge

Typically, the interest rate on an adjustable rate car loan is shown as “BR +0.XX%”, with the bank’s base rate (BR) being BLR BNM – mortgage style. In the case of RHB Bank, this prime interest rate is labeled as a fixed rate loan equivalent for better comparison – for example, the green finance rate for plug-in hybrids and electric vehicles is currently BR +0.19% p.a. (BR for RHB is 3.75% ) , which is equivalent to a fixed loan interest rate of 2.10% per annum.

If you notice that 2.1% is lower than the typical current rate on fixed rate loans, that’s because the latter is typically priced based on the bank’s market forecast, and any potential future increase in BLR would have already been factored into the rate offered. in advance, since the bank ensures its future profits today.

There are also some things about fixed rate loans that many people don’t know about. This so-called “Rule of 78”, used by banks in Malaysia, charges interest first for the earlier period of the loan, gradually reducing it towards the end of the term.

Potential interest savings on lump sum payment – click to enlarge

This is beneficial for the lender as they make a profit sooner, but not so much for the borrower: sell your car after two or three years and you may be shocked that “so little is paid off” and the repayment amount is still high. . That’s because a huge portion of what you’ve paid so far is just interest.

In conclusion, there is nothing wrong with fixed rate car loans as they offer simplicity and security. But if you want more control over your finances and want to save on both interest rates and tenure, variable rate loans offer more flexibility – the ‘pay more, pay less’ principle means you can put the extra money to good use , reducing the size of your loan. main balance. There are also no exit fees for early settlement.

Looking at RHB Bank’s variable rate car loans, there is a green finance rate for PHEVs and EVs with finance amounts up to RM500,000. The interest rate is BR +0.19% per annum, which is equivalent to a fixed rate loan of 2.10% per annum. There is also a Volvo car finance package offering BR +0.01% per annum (equivalent to a fixed rate of 2% per annum) for up to 90% financed and tenures of up to nine years.

Do you want to sell your car? Sell ​​it with Carro.