The basic working principle of a car loan is a simple one. The bank agrees to fund up to 90% of the cost of your new car (can be less in case of an old car), and you pay the remaining 10%. Once the loan is disbursed you are required to start paying it back in monthly instalments that are a combination of the interest and the principal amount that you borrowed. This payment is done every month for a fixed number of years, depending on the amount that you wish to pay every month. The maximum tenure of this loan can be as much as 9 years, which means that the total number of payments you end up making are 108. But what happens if you don’t want to pay for the entire duration? This is where a car loan settlement comes into the picture.
What is car loan settlement?
A car loan settlement is basically you paying back the remainder of the car loan in one go, as a lump sum. For example let us assume you borrowed RM 100,000 at an interest rate of 3.5% per annum. The repayment period you chose is 7 years, 84 months, and the monthly payment being made by you is RM 1482.14. It has been 3 years since you took the loan and you have saved up a lot of money with which you want to settle the loan. If you approach the bank you will be informed that you have paid back a total of RM 53,357.14 over the last 36 months and to finish the loan you just have to pay RM 63,401.68.
Once you pay the sum, the loan will be considered a paid up loan and no future payments will be required.
Advantage of settling car loans
- The biggest advantage of settling the car loan early is that almost all banks offer a rebate on the settlement amount. In our case, the one of the RM 100,000, the savings that can be made with settling the loan early can be as much as RM 7,741. This is a sizable amount and can definitely be considered a good saving.
- The savings that are made by settling the loan early are almost always on the interest that was due on the loan.
- Another advantage of settling car loans is that many of the banks tend to offer early settlements with no extra fee.
- The loan settlement is also available on loans that are taken for used cars or cars that were
The rule of 78
The rule of 78 is a formula used to calculate the yearly interest. It is of little significance to those who pay their car loans for the entire duration, but a considerable significance to those who are considering going in for a settlement. This is a method that allows banks to get the most out of a car loan that is being settled early. The main thing about this rule is that banks use it to calculate the unearned interest.
Should you go in for a settlement?
The decision of going in for a settlement of a car loan depends on various factors. The first of these will be your ability to afford the settlement. For example, if the settlement amount is RM 63,401 (from the example stated earlier) and you don’t have that kind of cash then you can continue paying the monthly instalments. However, if you do have that kind of cash and you realize that going in for a settlement will not make a difference to the amount you will eventually end up paying then there would be no point in settling the loan. If, however, the rebate you get is a considerable amount that you end up saving them it would make sense to go in for a settlement.
Whatever your decision, the best advice that can be given when it comes to car loan settlements is that you should know exactly how much you will save before you go in for a settlement.