Negotiate for a reducing balance interest rate
If you are planning to buy a car and get confused by all the loan jargon, take some time to do your homework before you sign on the dotted line.
The interest on a loan is usually calculated on a flat rate or on a reducing balance interest rate which can be either daily, monthly, quarterly or annually. Stay away from attractive “flat interest rates”. The effective interest rate actually becomes higher with this method of calculation, rather than the normal methods like annual reducing balance or monthly reducing balance. The reason for this is that the principal amount doesn’t get reduced with EMI payments. So you end up paying more interest, apart from the loan amount.
On a ‘reducing balance’ interest rate, each interest payment is calculated as the previous balance multiplied by the annual interest for12 months. With each monthly payment made, the balance amount owed, becomes smaller and smaller. So the next payment is calculated including interest on the smaller balance.