Car loans are not actually 'loans' in a sense. They are actually reffered to as hire purchase. Simply because your car is not viewed as collateral by banks thus technically, ownership of the vehicle belongs to the bank. Think of it as 'renting' a vehicle from the bank.
1. New vs Used
Logically, banks will charge higher interest rate for used car compared to new cars. Used cars have a lower resale value and it’s hard to predict the value of the car a few years down the line. Some banks will also set a vehicle age limit (Up to 12 years) for people who plan to purchase a used car.
2. National vs Non-National
Banks charge lower interest rates for non-national cars like Toyota and Honda as compared to national cars like Proton. However, there is only a minor difference, and shouldn’t be your top priority when choosing a car to purchase.
3. Short Tenure vs Long Tenure
Banks charge a lower interest rate for a long tenure compared to short tenure. Ideally, you should opt for a shorter loan term if the monthly repayment is within your budget.
4. Get a pre-approved loan
Getting pre-approved loans are useful to know how much you can afford. Just visit a couple of banks and enquire about the interest rate and amount of loan that you are able to get based on your credit score. Better yet, use our handy comparison tool to check for your best fit! Car loans vary from bank to bank so be sure to compare as many as you can.
5. Margin of Finance
Banks might offer lower interest rate if you opt for a lower margin of finance. If you can afford to put down a bigger down payment, you stand to save more on interest fees.
6. Dealership vs Bank
It is common to have your car dealer arrange for the application of a car loan on your behalf. It’s definitely an easier option. However, there might be hidden commission charges that may not be in your favour. Always do your research beforehand and compare which bank or dealership gives the best deal for you.
7. Think before you want to settle your car loan early
If you have the cash, paying off you car loan in full can be a lucrative idea. However, there may be scenarios where you stand to gain more by placing your money into an income generating fund (EG: Fixed Deposits) Read more about settling your car loan early to make sure you know whether you should settle your car loan early.
8. Islamic vs Conventional
There is a difference between Islamic and Conventional car loans. To understand more about the difference between both of them, read our article on Islamic VS Conventional Financing and decide on which type of loan to take up.
9. Fixed vs Variable Interest Rate
Banks offer two type of interest rate for car loans: fixed and variable interest rate. In most cases, the fixed interest rate loan type would be the popular choice due to the market offerings and stable monthly repayments. However, there are different types of car loans that could be beneficial to you.
It is imperative to analyze your financial portfolio before deciding on a loan. Choosing the right car loan that matches your financial portfolio can end up in significant savings. Do yourself a favour and don’t skip the research.