Assuming you have fulfilled the car loan requirements in Malaysia, you are close to borrowing a loan to buy your first car. You may have heard that there are two types of loans that you could choose: fixed and variable rates.
Whichever you pick to settle your car loans depends on your own tolerance of financial risk and your current financial status. Since you are curious, here are the differences between a fixed and variable rate.
Fixed rate
This is the type that many car owners will likely take because it is the safest path to take when stability is a priority in their eyes. The interest is calculated based on the amount you borrowed and the length of the loan period. It will be fixed this way until all of your loans are settled.
A higher interest rate may be charged if the lender believes that at some point, you may not be able to make your usual payment due to changes in factors such as your credit score, income and debt levels. As your payments clear your borrowed debts and reduce the total interest, it is useless to pay beyond the required numbers because that will be considered as an advance for the following month.
For instance, if you actually paid off everything in two years rather than the scheduled five, you still have to pay the remaining interests owed to the bank. Make sure to check with them if you have extra cash to potentially settle your loans early, as this action will earn you a rebate, also known as a penalty.
Variable rate
A variable rate is calculated based on the prime rate set by the bank, depending on the market conditions, your credit score, income and other financial factors. This interest rate is higher than a fixed rate’s, and is calculated over time based on the amount after deducting your monthly payment.
If you have extra cash, some banks can actually allow you to reduce your interest by making extra payments towards the principal amount of your loan. Just check with them if this is possible for you to do.
Despite this advantage, the interest rate can increase if it is affected by a sudden change in the market condition. Knowing that the market never walks in a straight, predictable line, expect to pay higher interest rates when the time has come.
If your lender does not have an interest rate, this is bad news, and it is a reason why you must always do research on prospective lenders before settling in one to borrow their car loans and make monthly repayments. If one does not have an interest cap, the rate can increase over time.
If you are unlucky, you might be underwater on your car loan, as in you owe more than it is worth and you may become stuck in a quicksand of debt. Don’t blindly jump into a random lender.
With an interest cap, the loan will not exceed the rate as per rule. Also known as a “ceiling rate”, a variable rate can be your choice if it isn’t too far above the set fixed rate.