Most auto loans on the market have fixed rates, but there are banks that offer floating rates for borrowers.
A fixed rate auto loan is one where the borrower signs a loan agreement that clearly states the interest rate, for example, 2.20% p.a. The interest rate that the borrower has to pay at the time of the loan term is 2.20% p.a.
Simply put, a fixed-rate loan is a loan that is calculated based on the principal amount and the term of the loan, and then amortized monthly, with no change in the amount the borrower has to repay each month during the term of the loan.
As for floating rate auto loans, although the interest rate is clearly stated in the contract when the borrower signs the loan agreement, the interest rate will change according to the national bank’s overnight policy rate (OPR). If the national bank announces an interest rate increase, then the borrower will have to pay a higher interest rate.
The calculation of a fixed rate auto loan is very simple – multiply the total amount borrowed by the interest rate and then multiply it by the number of years borrowed to get the total amount of interest to be paid. Add the total interest rate and the total loan amount, divide by the number of months borrowed, and you will get the monthly loan amount.
Here is an example of a fixed rate car loan. Ming has a RM50,000 car loan with a 7-year term and a fixed interest rate of 2.50%.
The total interest that Ming needs to pay for the whole loan period is RM8750.
RM50,000 X 2.50% X 7 years = RM8750
Ming’s cost of borrowing is RM58,750.
RM50,000 principal + RM8750 interest = RM58,750
Siu Ming will have to pay RM699 per month at the end of the 7 years borrowing period.
RM58,750 / (7 years X 12 months) = RM699
