Conventional vs Variable Rate

If you drive a car, a car loan is something that you’ll almost certainly have to undertake a couple of times in your life. In this article, we explain the difference between a Conventional Car Loan and a Variable Rate Car Loan, and how they’ll affect your wallet in the long run.

Conventional Car Loan

A conventional car loan is a rigid form of car loan where your interest is calculated based on the principal amount you borrowed and the length of your loan period. With conventional car loan, your monthly instalment is 'fixed'.

So even if you decide to pay more for one month, the excess monthly payment you make is treated as advance payment for the future and does not reduce the interest on your car loan.

Example of How Conventional Car Loan Works

Your Principal Loan Amount: RM80,000

Loan Interest Rate: 2.8%

Loan Period: 7 years

Interest Amount: 2.8% x RM80,000 x 7 Years = RM15,680

Your Monthly Instalment: (Principal Loan Amount + Interest) / 84 Months = RM1,139

If you decide to pay RM1,500 in one particular month instead of RM1,139, the extra money you pay does NOT reduce the total interest incur on your car loan.

Variable Rate Car Loan

Variable rate car loan is a more flexible type of car loan that offers you the freedom to reduce your interest by making extra payments toward your car loan. Usually, these type of car loans come with a linked current account and the interest incur on monthly rest based on reducing balance method. For those familiar with home mortgages, a variable rate car loan with a linked current account works just like a flexi-home loan. You can decide whether to maintain or revise your monthly instalment amount should the rate change. This provides greater savings and flexibility. AmBank is the first bank (since 2005) that offers variable rate car loan in Malaysia.

Example of How Variable Car Loan Works

Assuming the same interest rate and loan period as above, this is what happens when you decide to deposit RM10,000 into a linked account:

Your Principal Loan Amount: RM80,000

Amount in your Linked Account: RM10,000

Amount that incurs Interest: RM80,000 – RM10,000 = RM70,000

Interest Amount: 2.8% x RM70,000 x 7 Years = RM7165.32

Your Monthly Instalment: (Principal Loan Amount + Interest) / 84 Months = RM918.63

Remarks: Interest incur on variable rate car loan is calculated based on Base Rate (BR) and the rate depends on the financial market movement.

Which Car Loan Should I Choose?

Choosing between a Conventional Car Loan and a Variable Rate Car Loan may depend on numerous factors: the difference in terms charges between the packages, possibility of movement in interest rate over time, and the difference in installment amount between the packages. In the current interest rate environment, if the variable rate isn't at least a full percentage point higher than the fixed rate financing. However, people who prefer consistency might favor conventional car loan due to its predictable nature. Whatever it is, when it comes to car loan, the important thing is to do your research and have a clear repayment strategy.

Looking for a suitable car loan? Visit our Hire Purchase Interest Rates page to find the best car loan offered by different banks in Malaysia.

undo Car Loan Guides & Tips