When customers opt to take a loan to purchase a car, they need to understand a list of factors affecting the interest rates on which the loan is obtainable at. Keeping these factors in mind, customers can filter out the loan packages according to their individual needs.
Let’s take a look at the factors that affect car loan interest rates in Malaysia:
- Financing Amount or Loan Amount
- Credit Score & Credit History
- Down Payment
- Income of the Applicant
- Tenure of the Loan (Financing Tenure)
- Type of Car
- Age of the Car
- Base Rates of a Bank
Let’s go one by one:
Financing Amount or Loan Amount
One of the major factors affecting the car loan interest rate is the loan amount an individual is applying for. The trend with the interest rate is that the higher the financing amount is, the lower will be the interest rate associated with the funds obtainable. The interest rates or profit rates will directly depend upon the amount of financing a person applies for.
Credit Score & Credit History
The interest rates at which a car loan is obtainable also depends upon a person’s credit score. Most of the banks use CCRIS (Central Credit Reference Information System) to check the credit score of the applicant. CCRIS maintains the credit record history of customers and is managed by Credit Bureau of Bank Negara Malaysia. Before giving out a car loan to its customers, a bank or a financial institution checks the credit score of the applicant. If applicants have a bad credit score or have missed a payment on their credit card bills or any other loan instalments, they will receive a car loan at a relatively higher interest rates. Whereas, if the customer maintains a good credit score, the funds obtainable via the car loan will come at a lower interest rate.
Another major factor affecting the interest rates associated with a car loan is down payment. The higher down payment directly means that the interest will be charged on a lower amount. This makes it easier for the bank to approve the loan to a customer. Thus the interest rate goes down with an increase in down payment for the car purchase. Most of the banks and financial institutions provide funds up to 90% of the car’s price. For the packages that provide up to 100% of the financing, the interest rates are higher.
Income of the Applicant
In order to get a lower interest rate range on a car loan, one must have a lower debt-to-income ratio. A low debt-to-income ratio proves to the bank that it would not be difficult for the customer to afford the repayment. Whereas a high debt-to-income ratio will make it difficult for the customer to obtain a car loan. Most of the banks and financial institutions come with a maximum limit of debt-to-income ratio in order to see if the customers are eligible to get the car loan. Lower the ratio, the better are the chances for an individual to get the loan approved.
Tenure of the Loan (Financing Tenure)
Another major factor that comes into play is the length of tenure chosen with a car loan or hire purchase. It is seen that the shorter the repayment tenure is, the higher the interest or profit rate associated with the loan will get. With longer repayment tenures, customers can get a lower range of interest or profit rate. But the customers should keep in mind that choosing a longer tenure may result in paying more amount to the bank or the financial institution over the duration of the loan tenure.
Type of Car
The interest rates associated with a car loan also depends directly on the type of the car a customer is applying the loan for. Different types of cars may have a different range of interest rates associated with them. For example, the passenger vehicle loan comes with a lower interest rate range than that of a commercial vehicle. The rate of interest at which a car loan is obtainable also depends upon the car’s model. The interest rates can also be different for national and non-national cars. A general trend shows that the loans obtainable for a national car come with a lower interest rate than that of a non-national car.
Age of the Car
Another factor that directly affects a car loan interest rate in Malaysia is the age of the car. It is generally noticed that a loan for a new car comes with a lower range of interest rates. But the older the car gets, the interest rate at which the loan can be obtained gets higher. The pattern is based on the resale value of the vehicle. A new car has a relatively higher resale value than that of an old or used car. It is also noticed that the loan for reconditioned unregistered cars comes with a higher interest rate than that of a new car.
Base Rates of a Bank
The floating rates of profit or interest associated with a car loan directly vary with the base rates of a bank or financial institution. For a conventional car loan package, the floating interest rate varies with the change in bank’s base rate. Whereas, for Islamic car loans, the floating profit rate varies with change in base financing or base lending rate of the bank.