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Car loan savings. 5 versus 9 years. Which is better, really…

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road car vehicle blur

Not many of us buy a car without a loan. Do we know enough about car loan savings? The higher the number of years, the higher the actual interest paid. The lower the number of years, the lower the interest which we will pay. Statistically, this is true and this is why some would recommend that we fully pay for the car within shortest time frame possible. This will save us lots of interest payments. By the way, this is true yeah. The faster we pay, the lower the total interest which we will have to bear. However, we should also understand another side of the story yeah. There are two sides to a coin, right?

RM100,000 car, okay?

We assume we are buying a typical RM100,000 car. Note, this is only for the purpose of showing the number and not intended to ask you to buy any car, whether below or above RM100,000. The calculation is as below for a RM100,000 car with a 10% downpayment and a loan period of 9 years. Total monthly repayment is RM1,095.83 or RM1,096 if we rounded it up. Total actual loan interest payable at the end of 9 years is RM56,700.

The image right after the below one shows what happens when it is a 5 year loan.

car loan savings
Source: http://calculator.com.my
car loan savings
Source: calculator.com.my

Total monthly repayment is RM1,762.50 or if we round it up, RM1,763.00 Total interest payable for this loan is only RM31,500. Compared to a 9 year loan, this is a savings of RM56,700 – RM31,500 = RM25,200

How much extra per month?

If we take this RM25,200 extra and we divided it by 9 years, then this is an extra RM2,800 per year. Divided by 12 months, that’s an extra RM233 which one technically bears every month. I know, everyone would now share with us all the many extra things we could buy if we have an extra RM233 every month. Let’s also look at the monthly repayment now.

Monthly repayment for that 9-year loan? RM1,096. Monthly repayment for that 5-year loan? RM1,763. The difference every month in terms of amount? RM1,763 – RM1,096 = RM667 per month. RM667 per month is quite a significant amount because within a year, we could have saved RM8,004 which we could then use to invest into a stock which gives a return of 8%? That’s extra RM640 per year for 9 years and it would be an extra RM5,763.

(I know, you wanted to say it’s just 8 years since first 12 months was used to save, then I wanted to also remind you that we use a simple calculation versus a compounding interest… give and take yeah) Plus we have not even factored that we may have bought a good stock and there’s capital appreciation gains. Forget that for now.

Total interest difference just now was RM25,200 after 9 years. Total interest we earn from our FIRST year savings is RM5,763 and this meant ACTUAL savings from the interest is now just RM25,200 – RM5,763 = RM19,437

What happens end of year 2 and beyond?

This does not yet include what happened to the 12 months savings on year 2 and we reinvested the same amount. It does not yet include the year 3 savings and so on. I will not continue the calculation but I hope this tells all of us another side of the story and it’s not just that simple argument that paying in 5 year is way better than paying in 9 years yeah.

I know, now someone may want to point out that my loan repayment stops after 5 years while that person paying for 9 years would have to keep paying for the next 4 years. Just note that the person paying in 5 years have paid ALL the necessary interest in 5 years while the one paying in 9 years are paying over 9 years.

Personally, I have never taken a 9-year car loan

By the way, I do not have any car loan which is 9 years. Wife’s ex Kelisa was 5 years. Her current Persona was 7 years but we paid in full by the end of 5th year because of a huge gain from a property sold. My ex Persona (yes, we had TWO Personas) was 7 years but was fully paid in 3rd year because of the same gain from that one property we sold. My current Exora is 7 years and I have not sold any property, so, I think will just let it run its course. 🙂

More savings, possible?

Happy understanding that financial knowledge is super important and IF we really wanted to save more interest, then the right thing to do is to buy a cheaper car and not that RM100,000 car. Looking for safety? Most cars have 5-star crash safety rating these days, including a RM50,000 car. Looking to boost your image? Erm… RM100,000 car does not do much beyond boosting our image among our peers.

Our friend who’s much more successful would probably be driving a car more than twice the price of our RM100,000 car. My ex-staff drives a car which is double the price of my car when I hired him many years ago. Oops… Plus, our CEO who’s earning RM30,000 per month would definitely have more than enough to buy a RM250,000 base model luxury car too. Not so sure if he wanted to get a RM100,000 car instead… Does not boost his image as a CEO.

Let’s also not forget that IF we could save RM667 per month, then 5 years later, we have enough downpayment for a RM400,000 property… RM667 x 12 x 5 = RM40,020. This is 10% downpayment for a RM400,000 property. Happy understanding both sides of the story. No links below for you to buy a car or get a loan yeah. Just sharing numbers. Final decision is definitely ours to make. Remember yeah, we also did not yet talk about the depreciation loss.

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