Car buyers should be familiar with the usual auto financing products offered in the market, and most of them will take up fixed rate auto financing, which is traditionally offered by all banks. But did you know that there’s an alternative, one that could offer you flexible payments over the tenure of the financing, saving you more money in the process?
It’s called “variable rate financing,” similar to that used in home financing, where the profit charges – commonly known as interest payable in a conventional loan – is calculated based on the daily rest and reducing balance method. Yes, it doesn’t sound as straightforward as a fixed rate financing, but here’s an explanation of how it works and how you could save more compared to a fixed rate financing.
Fixed rate financings are simple enough, where interest / profit is calculated upfront on your financed amount over the financing period with no changes in interest / profit rate. A variable rate financing, as its name suggests, has a financing rate that adjusts over time in response to changes in the market.
While it may sound like it may cost you more, variable rate financing actually tends to have lower financing rates (at first) compared to fixed rate financing, and any upward fluctuation means a minimal increase given that the financed amount in the auto financing is typically much less than your average mortgage.
In fact, a variable rate financing such as that offered by RHB practices a reducing balance method, where the profit charges is calculated over time based on the outstanding amount after deducting what you’ve paid every month. What this means is you have the flexibility to control the total profit charges throughout the tenure, simply by reducing the principal balance when you pay extra even by a few Ringgit.
Essentially, the more – and faster – you pay, the more you save on the total profit charges, something that doesn’t apply to a fixed rate financing, because whatever extra money you pay sooner doesn’t reduce the total profit incurred but instead kept for future installments.
As such, variable rate financing is a great option for consumers who plan to pay their financing off quickly. Should you have extra funds available, simply pay for it when you choose, as paying your financing ahead of schedule, even a day earlier as the profit charges by RHB is calculated on daily basis, will reduce the principal amount, thus reducing profit charges incurred.
The interesting part is that given its positives, the reducing balance method to calculate the profit charges may soon be a regular sight. This is because the proposal to practice this method for all retail financing products, inclusive of auto, is in the implementation pipeline by regulators.
However, you can get all the benefits right now via RHB’s variable rate financing. Find out more about variable rate financing and how it can benefit you here.
