Purchasing a car or any vehicle is a very simple process. Basically, you start with a downpayment (10% or more of the amount of the car) and then take out a loan from the bank for the remaining 90%. But do you know how are you charged on interest?
Are car loans and hire purchase loans the same?
When you borrow money from the bank to buy a car, they will offer you a hire purchase loan instead of a straight-up car loan. They are different types of loans. Hire purchase is where you are basically leasing the car from the bank until you pay off the whole amount. A car loan is where you own the car (title is your name) which is quite insecure for the banks.
Types of hire purchase loans
Banks that offer hire purchase loans are unsecured loans. In other words, they pay the car on your behalf without needing any form of guarantee or collateral. This is purely based on your credit ratings with Bank Negara Malaysia. Unlike other loans, hire purchase loans to apply a single interest rate at the time of application throughout the entire term.
Calculating the hire purchase loan
Assuming you are buying a car that cost RM100,000. You pay a 10% downpayment (which is RM10,000) and apply for an RM90,000 loan. The interest rate that the bank offers you is 3% for 5 years. Hence:
- Principal amount: RM90,000
- Interest rate: 3%
- Duration: 5 years (60 months or installments)
The total interest rate you will be paying here would be:
(90,000 x 0.03) x 5 = 13,500
That means you are paying interest of RM13,500 over the course of 5 years. To calculate your monthly installments, it would be:
(90,000 + 13,500) / 60 (installments) = RM1,725 per month (for 60 months).