Way to calculate car loan interest
Do you understand how car loan interest is calculated?
The majority of auto loans on the market are fixed-rate, but some banks offer borrowers floating rate auto loans.
The term “fixed-rate car loan” refers to a loan contract that clearly states the interest rate of the loan, such as 2.20 percent p.a., when the borrower signs it. The borrower must pay 2.20 percent per annum in interest during the loan period.
Simply put, a fixed-rate loan is calculated using the principal amount and loan term, and the loan items are amortised on a monthly basis. The borrower’s monthly repayment amount remains constant throughout the loan term.
In the case of a variable rate car loan, the borrower will clearly state the interest rate of the loan when signing the loan contract, but the interest rate will vary according to the National Bank’s overnight policy rate (OPR). Borrowers will have to pay higher interest rates if Bank Negara announces an interest rate increase.
Because the loan balance is calculated, each time the borrower makes a payment, the loan balance is reduced and the interest is reduced accordingly. As a result, the loan principal and interest of each instalment will be gradually reduced, which is the most significant difference between the floating and fixed interest rates.
A fixed-rate car loan’s calculation method is very simple: multiply the total loan amount by the interest and multiply the loan years by the number of years to get the total interest that must be paid. You can calculate your monthly loan payment by adding the total interest to the total loan amount and dividing it by the number of months borrowed.
Here’s an example of a fixed-rate car loan. X has an RM50,000 car loan with a 7-year term and a fixed interest rate of 2.50 percent.
X must pay RM8,750 in total interest over the life of the loan.
RM50,000 X 2.50% X 7 YEARS = RM8,750
The cost of borrowing for X is RM58,750.
RM50,000 principal plus RM8,750 in interest equals RM58,750.
X must pay RM699 per month for the duration of the 7-year loan.
RM58,750 divided by 7 years and 12 months equals RM699
