Difference Between Housing and Car Loan Interest Calculation

I believe still many people do not know how the housing loan and car loan interest are calculated differently.

Car loan is not like housing loan. Car loan interest is calculated based on the total amount of loan that you have and the interest is fixed. So, car loan is flat and if you settle the loan payment early, you still have to pay the interest for the rest of the agreed loan tenure.

My Personal Advice:

Do not take car loan for longer period. If you can’t afford the monthly payment due to the short tenure, then try to work backwards and set a target of shorter loan period, and save up a sum of money so that you can put a bigger downpayment. In the end, you’ll save a lot of money in the long run.

Imagine: if you loan 40k, 40k x 3.75 %(9 years loan interest) = RM1500. So, your final interest would be RM13,500.

Let say if you put in a bigger downpayment 20k, 20k x 3.5%(5 years loan interest) = RM700. So your final loan interest would be RM3500 only.

That’s saving of RM13k++, not to mention paying a car loan for 9 years is just so ridiculous…I can see most of the people will start cursing after 3-5 years time that they still have to pay the bank another 4 years when their car value is less than half the original value.

Car is a liability not an asset. But if you invest in properties, the price might goes up 10 years later.

For me, with less commitment on a car, then your money can be put elsewhere in other investment vehicles to make the money grows. This is the reason why I don’t think of buying a fancy car at this moment.

How About Housing Loan?

Housing loan interest is calculated based on the loan principal (the amount of money that you still owe the bank) that you have and the loan interest is not fixed.

It’s no harm to get more housing loan as if you have more money later, you can make extra payment to reduce your loan interest by very significant amount.

My Personal Advice:

Let say if you borrow 50k from a bank at 5% interest rate(after taken into account of BLR) for 5 years.

1 year housing loan interest:

= 100k x 5%
= RM5000 (Annually)

First month housing loan interest:

= RM5000 / 12
= RM416.66 (1st month)
Let say your monthly installment amount is 1k per month, then you will reduce your principal amount from 100k:

Your principal amount after 1st payment:

= 100k – (1k – 416.66)
= RM99416.66 (New Principal)

The 2nd month loan interest will be calculated based on this new principal amount, RM99416.66 and every month you will be reducing your principal amount.

2nd month housing loan interest:

= RM99416.66 x 5% / 12
= RM414.23 (2nd Month)