TIPS: Do not use commas when quoting prices in RM.
Nominal versus effective interest rate
The nominal interest rate is the periodic interest rate times the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded). A nominal interest rate for compounding periods less than a year is always lower than the equivalent rate with annual compounding. A nominal rate without the compounding frequency is not fully defined: for any interest rate, the effective interest rate cannot be specified without knowing the compounding frequency and the rate. Although some conventions are used where the compounding frequency is understood, consumers in particular may fail to understand the importance of knowing the effective rate.
Nominal interest rates are not comparable unless their compounding periods are the same; effective interest rates correct for this by “converting” nominal rates into annual compound interest. In many cases, depending on local regulations, interest rates as quoted by lenders and in advertisements are based on nominal, not effective interest rates, and hence may understate the interest rate compared to the equivalent effective annual rate.
The term should not be confused with simple interest (as opposed to compound interest). Simple interest is interest that is not compounded.
If you happen to have a Financial Calculator, you can easily use the following guide to determine your Effective Interest Rate:
For example, you borrowed RM58,000 for your new Toyota VIOS for 5 years, with a nominal interest rate of 3.00%. According to the repayment schedule issued by your bank, you are expected to pay RM1,112.00 monthly for the next 5 years (60 months).
(i) Loan Amount (PV) = 58,000
This value must be positive because you are actually getting RM58,000 from the bank into our pocket.
(ii) Monthly Installment (PMT) = -1,112
This value must be negative because you are going to pay out this amount out from our pocket.
(iii) Repayment period (n) = 60 months
We need to convert this repayment period of 5 years into 60 months because you are paying the installment is in monthly mode.
With the calculator, you just need to punch the numbers in the following order:
Step 1: 58000 PV
Step 2: 1112 (+/-) PMT
Step 3: 5 [Shift] [n]
Step 4: [Comp] [i%]
In this example, you should get a monthly interest rate of 0.47%. Hence, your Effective Interest Rate is 0.47% x 12 = 5.65%. Hence, the difference between the rate advertised by the bank is 5.65% – 3.00% = 2.65% (Oops!).
Other Useful Tools
To find out how much you will be paying for your road tax, check out Malaysia Road Tax Rate.
To calculate your vehicles insurance premium, use the Motor Insurance Premium Calculator.
To apply or renew your car insurance, head over to InsuranceOnline.my.