Make Full Settlement on Car Loan to Save Interest

You don’t save any single cent by paying extra every month in order to settle your car loan early! But you can settle your car loan early and earn interest from FD and rebate from bank by 'Full Settlement.'

Scenario

You financed RM20,000 to buy a Proton Saga in 2020. The interest for car loan was 7.6% at that time. You signed up six years repayment term and paid RM404 as monthly installment.

How to calculate the monthly installment for car loan?

Loan amount: RM20,000
Interest: 7.6%
Term: 6 years

Interest amount per year: RM20,000 x 7.6% = RM1,520

Interest amount for 6 years: RM1,520 x 6 = RM9,120

Monthly Installment: (RM20,000 + RM9,120) / 6 years / 12 months = RM404

You have to drag for 6 years because you're afraid you couldn’t afford to pay more due to other commitments. But when you got yearly increment, you kept the excess money in a separate account as 'advance payment' for your car loan. You didn’t use the excess money to pay to the bank every month as advance payment but just kept it in Fixed Deposit. You accumulated it until the amount was equivalent to the outstanding amount of your car loan. You withdrew it and paid as 'Full Settlement' of your car loan. It took you 3 years 6 months to settle your car loan although you signed up for 6 years.

Here’s a question: Why you kept all 'excess money' in FD but didn’t pay to bank every month since it also can settle your car loan early? You don’t save the interest if pay in 'advance payment' every month but you will saved some interest if fully settled the loan, they are different!

It means, by paying extra money to bank every month, you will take 3.5 years to settle your car loan also but you don’t save the interest, your interest paid is still RM9,120.

However, when you paid lump sum as full settlement, the bank will 'rebate' the interest to you. So, remember, if you want to save some interests on your car loan, settle it early by full settlement; keep your extra money in FD to gain some interest while accumulating the amount for full settlement. You gain nothing if you pay extra payment to bank every month for early settlement.

You can always call to bank to check your outstanding amount; ask the bank staff, how much you need to pay if you want to make full settlement, then you will know how much you can save on interest.

Car Loan Guides & Tips