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What to consider when choosing car loans?

There are several factors to consider before signing up for car loans.

• Margin of finance
  

  In simple term, it means how much you can get from bank to buy your car. It is expressed as a percentage of the total cost of the car, and represents the maximum amount that you can finance with a loan. For example, if the margin of finance is 90%, this means that you can borrow up to 90% of the cost of the car and you will need to pay the remaining 10% yourself as a down payment.

• Down payment
  

  This is the amount of money that you have to pay upfront before the loan is disbursed. By making down payment, you demonstrate your commitment to repaying the loans. This also indicate your ability to save money. Generally, the size of down payment is 10% – 20% of total cost of your car. However, there are car loan promotions offering zero downpayment. It is important to realise that 0 downpayment means higher total loan amount. Do keep in mind that the more you borrow, the higher the total interest payment will be.

• Interest rate
  

  As the saying goes, there ain’t no such thing as a free lunch. For the money you borrow, you have to pay a fee for that part. In financial term, it’s the cost of funds, often indicated as percentage of total amount of loan. To rephrase this, you have to pay the cost of borrowing money. The interest rate can be fixed or variable. In Malaysia, the interest rate for foreign car is often lower than local car.
  There are various factors affecting the interest rate. For instance, the lender, the loan term, your credit score, and the type of car you are buying. Most importantly to note, borrowers with a higher credit score can get a lower interest rate, while those with a lower credit score may have to pay a higher interest rate. You can check your credit score at credit rating agency, such as CTOS.

• Tenure
  

  Tenure is the length of time to repay the loan. In other word, it is how long it will take to pay back all the original amount of loan and interest rate. A longer loan tenure usually means lower monthly instalment payments, but it also means that you will pay more in interest charges over the life of the loan.

All in all, buying a car with car loan is a long term commitment. We explore more in depth about what to consider when purchasing a car using car loans here.