It's all about the money...

Looking around us, I'm sure 90% of car owners bought their car using car loan facilities. And I'm also sure the bulk of them took up to 80% loan for their car. This makes financing a crucial component when buying and owning a car, but somehow not many pay much attention to it - most of us will only look at (a) how much cash upfront we need to fork out, (b) how much loan we can secure on the dream car that we are going to purchase, and (c) the monthly repayments.

Many choose to ignore the cost of financing the car and the long term commitment of servicing the loan. In fact, some went ahead to secure a full loan to fulfill their wish of buying their dream car - without much thoughts of the long term financial commitment in servicing it.

Now let's look at the terms and conditions of a bank loan to understand the cost of financing better.

Typically, banks offer car loans base on a flat rate calculations, instead of flexi or monthly calculations. Meaning interest rates are being charged upfront for the whole loan quantum, and then spread evenly throughout the repayment period.

Example:

Loan amount: $50,000
Interest rate: 2.5%
Quantum: 10 years

$50,000 x 2.5% = $1,250
$1,250 x 10 years = $12,500 (total interest charged)
$12,500 + $50,000 = $62,500
$62,500 / 120 months (10 years quantum) = $520.83333

Rounded up, $521 is the monthly instalment.

2.5% is the Nominal Interest rate or Stated Rate, but the Effective Interest rate is higher. The formula can be written as :

(r = effective interest rate, i = nominal rate, n = number of compounding periods per year)