Understanding Car Loans: Malaysia vs. US vs. Taipei – A Personal Insight

The concept of taking out a loan to buy a car isn’t foreign to most of us. However, how the interest on these loans is calculated can be confusing, especially when comparing practices from different parts of the world. My personal experiences across Malaysia, the US, and Taipei have offered some intriguing insights that I’d like to share.

The Malaysian Car Loan Conundrum

In Malaysia, how car loans are portrayed can be misleading. Here’s how:

  • Flat Rate Illusion: Car loans in Malaysia display a ‘flat rate’. This means that the interest is calculated based on the entire loan amount, not on the outstanding principal that is owed.
    • For instance, if you borrow RM100k at a flat interest rate of 3% for a 9-year loan, you will have to pay RM27k in interest over those 9 years (3% x 9 x 100k).
    • But that’s not how the effective interest rate works. In reality, the actual interest charged varies based on the outstanding principal. So if we look at the 3% flat rate, the effective annual rate will be around 2X of what is shown.

Because of this system, many Malaysians get an incorrect impression. They assume car loan interests are lower than mortgage interests, which currently hover around 4-5%.

The American Perspective

Upon moving to the US, I learned the following:

  • No Flat Rates Allowed: Flat rates are disallowed as they’re seen as misleading to consumers.
  • Lower Rates for Cars than Houses: To my astonishment, the interest rate on car loans is genuinely lower than that of mortgages in the US.
  • Shorter Terms: Car loan terms exceeding five years are typically not permitted. This is because a shorter term represents a lower risk, which subsequently means a lower interest rate. Consequently, car loan interest rates fell below mortgage interest rates when I borrowed money to finance my Mustang purchase there.

A Glimpse from Taipei

After settling in Taipei for over two years, the day came to buy my first EV – the Volvo XC40.

Some observations:

  • Effective Rate, Not Flat: Like the US, Taipei practices the effective interest rate system, keeping consumer clarity in mind.
  • An Interesting Financing Deal:
    • Down payment: 20%
    • Total loan: NT$1,800,000
    • First-year instalment: A very auspicious NT$8,888 per month (the Chinese associate prosperity with this number).
    • Instalments for the 2nd to 5th years: A low NT$15,000 per month.
    • After five years, an outstanding amount of $1,170,054 must be settled. The interest rate? A mere 2.39% – an effective annual rate, not a flat one.

Our car salesperson suggested opting for a four-year loan instead of five. However, the interest rate remained unchanged. I suspected their motivation was to prompt customers to sell their cars at the end of four years to settle the lump sum. And once you sell your car, the next logical step is to… buy a new one. A brilliant strategy for sales, isn’t it?

To accurately ascertain whether the car loan’s 2.39% interest rate genuinely reflects the costs over time, one must delve into the concept of the time value of money (TVM). Surprisingly, many educational curriculums, from schools to universities, often overlook this critical financial principle. While my educational journey as an aeronautical engineer immersed me in complex topics like calculus and trigonometry, TVM, which arguably has more day-to-day relevance, was not given its due prominence

After thorough analysis using a spreadsheet, I can confidently present the findings. Understanding such concepts can significantly enhance one’s financial acumen and decision-making prowess.

To ascertain the authenticity of the low-rate car loan package, I resorted to the IRR or XIRR formula. Using a spreadsheet, I verified the details and yes the bank is not bluffing about the low interest rate.

Want to Know How I Did It?

If this has piqued your interest, I’m considering a webinar to demonstrate how you can break down and understand loan packages. Leave a comment if you’re on board with this idea. Alternatively, you can turn to Google. The internet is a treasure trove of information – that’s where a lot of my learning comes from.

Remember, knowledge is power. When you understand the intricacies of your financial commitments, you’re better equipped to make informed decisions. Stay savvy and keep learning!

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Personal finance author and trainer

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