Car loans are helpful banking tools when you are planning to purchase a car. Banks or financial institutions provide you with funds to buy a car when you do not have adequate savings or funds to buy on your own.
Car loan settlement simply means paying back or settling your car loan in one payment before the loan tenure ends. Usually, you would have had to pay the car loan for a specific period of time determined while taking up the loan. After paying a few instalments or for a few months, you can decide to repay the loan in full when you have sufficient funds.
Car loan settlement can help you close your car loan in a short period of time instead of extending it for years. Since a car loan is a type of debt you owe the bank, it is better when you can free yourself from debt as soon as possible.
Benefits Of Car Loan Settlement
- Rebate on settlement amount: You can get a rebate on your car loan settlement amount when you close off your car loan early.
- Save Money On Interest: You can save money that is spent on car loan interest when you settle your car loan early.
- No Early Settlement Charges: Most banks in Malaysia do not charge you penalty fees for settling your car loan early.
- Available For Used Car Loans: Early loan settlement is also available on loans taken for used cars.
- Financial Freedom: You can close off your debt as soon as possible.
How Does Car Loan Settlement Work Exactly?
One thing you must remember when it comes to car loans is that banks or financial institutions do not calculate the loan in the way that you do. If you take up a car loan for 5 years, but end up settling it after 3 years, you may think that you saved on the interest that you had to pay for the remaining 2 years.
But that is not exactly how it works with car loans. Most banks in Malaysia employ the Rule of 78 while calculating interest on car loans. This rule defines the way banks or financial institutions charge interest and recover the specified interest.
What Is The Rule Of 78?
Rule of 78 is a method of calculating or charging interest on loans for every month. This rule is applicable for car loans and personal loans. This rule allows the banks to charge you the maximum interest during the first few monthly instalments instead of spreading it evenly across the entire tenure.
It means that banks can recover the interest fully during the initial period of the car loan. This rule does not affect much to those who repay the car loans for the entire tenure, but it can cause a significant effect when you decide to close your car loan early.
How Does Rule Of 78 Work On Car Loans?
When you take up a car loan, your monthly instalments at the beginning of your loan tenure would mostly be payments towards the total payable interest than the principal amount. The ratio of payment towards the interest will be more during the initial months, and would later include payment towards your principal.
In this way, banks will ensure that total payable interest on your car loan is recovered during the initial months of your car loan. Later when you decide to settle your car loan early, you may still have to pay the outstanding principal. This way, though you settle the car loan early, you still would have paid the total interest for the entire loan tenure.
Is An Early Settlement Worth It?
An early settlement on your car loan depends on many factors. You can choose to settle your car loan early when you have sufficient funds or savings with you.
You can use the car loan calculator to check exactly what you are paying for your car loan. You can also calculate the rebate you may get from early settlement. You can also verify with the bank as to the total amount payable in case of an early settlement. Check for any early settlement charges if applicable.
With all this information, you can calculate how much you would totally pay on your car loan if you settle early. You can also calculate how much you would pay if you repay the loan for its tenure period. The difference between these two figures can give you an idea on what you can save or lose on early settlement of your car loan.
When To Opt For Car Loan Settlement?
If you calculate that you can save more money on rebate or interest on car loan settlement when compared to paying your loan off until tenure ends, then car loan settlement is the better option. If there is no savings or not much difference in total amount, there is no point in settling the loan early.
If you want to get out of debt early and do not mind paying the full amount, you can go and settle the car loan. Once you pay the total outstanding sum on your car loan, it will be considered as a paid loan.
List Of Car Loans Available In Malaysia
- KFH Automobile Ijarah-i
- Hong Leong Mach Cruise Control Car Loan
- RHB Vehicle Financing-i
- AmBank AmAUTOMate
- Bank Islam Financing-i
- Maybank My First Car Loan
- Al-Rajhi Automobile Financing-i
- Hong Leong Car Loan
- Affin Bank Car Loan
- Maybank Al-Ijarah Thumma Al-Bai
Settling of car loans can not only fetch you a rebate but can also clear off your debt and increase your total debt to income ratio allowing for easier approvals of future loan or credit applications.