Understanding Interest Charges and Calculations

We often hear Hire Purchase (HP) interest rates quoted as 2.1% or 3.2%, while housing loan interest rates are often quoted as BR + (say 2%) or, previously, BLR (Base Lending Rate) – like BLR -2.5%. Why are the interest rates so low for HP? Is it true that they are cheaper than housing loans? Before we look at the interest calculations, let’s examine the differences between the two:

Hire Purchase (HP) Loans:

Tenure: Typically 5 to 9 years. Banks are generally not interested in shorter HP terms because they barely make money on them. Trying to get an HP loan for 1 or 2 years will likely result in rejection.
Interest: Fixed interest rate.
Down Payment: Usually, banks require a 10% deposit. For example, if you’re financing a car worth RM120,000, the bank is willing to lend you RM108,000. Sometimes, promotional campaigns offer full margin financing.

Housing Loan Tenure:

Tenure: Can range from 10 to 35 years or up to 70 years old, whichever comes first.
Interest: Floating interest rate according to the Base Rate (BR). You can refer to the table at the bottom of this page for CIMB Bank’s BR over many years (as an example)
Governance: This is regulated by Bank Negara Malaysia’s policies. For the first house, you can get 90% to 100% financing. If you are financing the third property onwards, banks will only finance up to 70%.

Car Loan (Hire-Purchase Financing)

Interest Calculations

Hire Purchase Interest (Straight Line Method)

Let’s consider two examples for a car costing RM80,000 with HP interest rates of 3% and tenures of 5 years and 9 years.

Example 1:

Loan Amount : RM80,000
HP Interest: 3%
Tenure: 5 years

Total Interest = Principal x Interest Rate x Tenure (Years)
Total Interest = RM 80,000 x 3% x 5 years = RM 12,000
Interest Per Year = RM2,400

Example 2:

Loan Amount: RM80,000
HP Interest: 3%
Tenure: 9 years

Total Interest = Principal x Interest Rate x Tenure (Years)
Total Interest = RM 80,000 x 3% x 9 years = RM 21,600
Interest Per Year = RM2,400

In both cases, the average annual interest remains the same at RM2,400 due to the straight-line calculation method.

Thinking of buying your first car – and wondering if new or used car would be wiser? Read our article HERE

Housing Loan Example

Loan Amount : RM 400,000
HP Interest: 4.5%
Tenure: 30 years
Your monthly instalment would be RM2,027 per month
Total Repayment (RM2,027 x 12 x 30) = RM 729,720
Therefore, over 30 years, your total interest costs would be RM329,720
Using a simple average, the Interest Cost is RM10,990 per year for a loan of RM400,000.
For easy understanding – you will find that your HP loan of RM400,000 would cost you an interest of RM12,000 a year. Therefore, your HP loan is more expensive even though it is quoted at 3% while your housing loan interest is at 4.5%

While you loan interest be cheaper if you go for shorter tenure?

Loan Amount : RM 400,000
HP Interest: 4.5%
Tenure: 20 years
Your monthly instalment would be RM2,531 per month
Total Repayment (RM2,531 x 12 x 20) = RM 607,440
Therefore, over 20 years, your total interest costs would be RM207,440
Using a simple average, the Interest Cost is RM10,372 per year.

What if we cut the loan to 10 years?

Loan Amount : RM 400,000
HP Interest: 4.5%
Tenure: 10 years
Your monthly instalment would be RM4,146 per month
Total Repayment (RM4,146 x 12 x 10) = RM 497,520
Therefore, over 10 years, your total interest costs would be RM97,520
Your interest cost is only RM9752 per year

Summary

Loan Interest for Car’s HP Loan: The interest for a car’s HP loan remains the same annually. For instance, if your loan interest is RM5,000 per year, you will pay RM20,000 in interest for a 4-year loan and RM30,000 for a 6-year loan.
Loan Interest for Housing Loan: Housing loan interest is calculated based on the reducing balance method. This means you will pay lower interest if your loan tenure is shorter compared to a longer tenure loan.
Financial Flexibility and Control with Flexi Loans: For greater financial flexibility and control, you can consider a 30 to 35-year tenure loan with a flexi option. This allows you to make additional repayments to reduce the principal and save on interest costs. Moreover, you can withdraw the excess amount if you need cash, providing flexibility (Flexi Loan).
Housing Loan Affordability: Housing loans are perhaps the cheapest loans you can get in Malaysia, making them an attractive option for borrowers.

CIMB’s Historical Published SBR (Standardised Base Rate) /BR/BLR/BFR series since January 2015

Date	Standardised Base Rate	Base Rate	Base Lending Rate
May 2023	3.00%	4.00%	6.85%
Nov 2022	2.75%	3.75%	6.60%
Sept 2022	2.50%	3.50%	6.35%
Aug 2022	2.25%	3.25%	6.10%
Jul 2022	2.25%	3.25%	6.10%
May 2022	2.00%	3.00%	5.85%
Jul 2020	1.75%	2.75%	5.60%
May 2020	2.00%	3.00%	5.85%
Mar 2020	2.50%	3.50%	6.35%
Jan 2020	2.75%	3.75%	6.60%
May 2019	3.00%	4.00%	6.85%
Dec 2018	3.25%	4.25%	7.10%
Feb 2018	3.25%	4.15%	7.00%
Jan 2018	3.25%	3.90%	6.75%
Jul 2016	3.00%	3.90%	6.75%
Jun 2016	3.25%	4.10%	6.95%
Jan 2015	3.25%	4.00%	6.85%

Source: CIMB Bank

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