A 3 Million Baht House vs Car: Why the Interest Differs

A house and a car can each cost three million baht.

The monthly payments can even be set at nearly the same level.

Yet the loans may finish at different times
and produce very different total interest.
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The reason is not only the advertised rate.

It is the method used to calculate interest.
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Many auto-finance agreements use a flat-rate structure.

Interest is calculated from the original principal
for the agreed term.

The displayed rate may look low
but it is not directly comparable with a reducing-balance mortgage rate.
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Home loans generally calculate interest on the outstanding balance.

As principal declines
the amount on which future interest is calculated also declines.

When a borrower pays significantly more than the required installment
the loan can finish much sooner
subject to the contract’s conditions.
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This comparison teaches an important financial lesson.

Do not compare loans by headline interest rates alone.

Ask:

Is the rate flat or reducing?

What is the effective cost?

How long is the term?

Are early repayments allowed?

What fees or insurance costs are included?
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The cheapest-looking rate
is not always the cheapest debt.

Note: Figures in this article illustrate the principle only. Actual costs depend on each contract, promotion, fee and lender condition.

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