You don’t save any single cent by paying extra every month in order to settle your car loan early! But you can settle your car loan early and earn interest from FD and rebate from bank by “Full Settlement.”

I financed RM20,000 to buy a Proton Saga in 1999. The interest for car loan was 7.6% at that time, very high but lower than few months before I took the loan. I signed up six years repayment term and paid RM404 as monthly installment.

How to calculate the monthly installment for car loan?

Loan amount: RM20,000
Interest: 7.6%
Term: 6 years
Interest amount per year: RM20,000 x 7.6% = RM1,520
Interest amount for 6 years: RM1,520 x 6 = RM9,120
Monthly Installment: (RM20,000 + RM9,120) / 6 years / 12 months = RM404

I have to drag for 6 years because I was afraid I couldn’t afford to pay more due to other commitments. But when I got my yearly increment, I kept the excess money in a separate account as “advance payment” for my car loan. I didn’t use the excess money to pay to the bank every month as advance payment but just kept it in Fixed Deposit. I accumulated it until the amount was equivalent to the outstanding amount of my car loan. I withdrew it and paid as “Full Settlement” of my car loan. It took me 3 years 6 months to settle my car loan although I signed up for 6 years.

Here’s a question: Why I kept all “excess money” in FD but didn’t pay to bank every month since it also can settle my car loan early? I don’t save the interest if I pay “advance payment” every month but I saved some interest when I fully settled the loan, they are different!

It means, by paying extra money to bank every month, I will take 3.5 years to settle my car loan also but I don’t save the interest, my interest paid is still RM9,120.

However, when I paid lump sum as full settlement, the bank will “rebate” the interest to me. I can’t really remember how much was it but it was around RM2,000 plus. It means the actual interest paid for my entire car loan was around RM7,000 instead of RM9,120.

So, remember, if you want to save some interests on your car loan, settle it early by full settlement; keep your extra money in FD to gain some interest while accumulating the amount for full settlement. You gain nothing if you pay extra payment to bank every month for early settlement.

You can always call to bank to check your outstanding amount; ask the bank staff, how much you need to pay if you want to make full settlement, then you will know how much you can save on interest.