Early loan settlements can be quite costly if you don't understand them from the beginning of your loan period. There are discounts for finishing of your loans early, but not all loans are calculated the same way.

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Car loans

Car loans in Malaysia are calculated based on the Rule of 78. The idea is that you service the greater amount of the interest early in the loan tenure.

Say you took a RM50000 loan at 3% for 5 years.

Your total repayment would be RM57500 because you're repaying RM50000 (principal) + RM7500 (interest).

After doing a quick calculation in your head, you might think that settling the loan two years early would save you RM3000. But when you call your bank up to check, you find that you're only saving around RM1000.

That's because, the interest charged in the beginning of the loan is higher than the end of it. Hire purchase in Malaysia isn't calculated based on simple interest.

In actual fact, the later the settlement, the less savings there are left.

Housing loans

Malaysian housing loans are calculated based on reducing balance.

The amount of interest you pay is calculated at the end of every 12 months. In this case, the more payment you make on the principal, the less interest is calculated.

But be careful of paying advanced installments when you actually meant it for outstanding balance. Repaying the loan through monthly deduction or online banking goes into advanced installment, which means you've paid for next month's installment.

You'd need to check with your branch how to pay to reduce the outstanding balance if you want to reduce the interest charged.