Car Loans: To redeem or not to redeem

[Emils]

I've been pondering over this and would appreciate your views on this.

 

Assuming I have a sum of money sufficient for me to fully redeem my car loan. In light of the high inflation during this period, would it be wiser:

 

1. Hold onto the money and continue the loan till its full term since the real value of the instalments that you are paying to the bank will decrease over the years due to inflation.

2. Fully redeem the car and enjoy the interest rebate (after discounting any early redemption penalties).

 

Any advice? Thanks!

[Pyramid_sg]

I think you need to provide more details before the bros can advise. How much is your car loan, interest rate and how long is your loan? At what year are you currently in your loan?

Edited August 19, 2008 by Pyramid_sg

[Dragos]

put the money to better use...invest or just keep for rainy day...

[Snowbell]

Option 1 better.

 

Should have lock-in period, hence the early redemption penalties not worth it.

[Emils]

I've loaned $68K over 7 years and have recently passed my 1st year of the loan...

[Akula]

Most prob still in the lock-in period, so might not be so worth it to redeem. Normally redeem in lock-in period will incur abt 20% penalty.

[Chongster]

i thought standard these days is rule of 78 - 20%...

[Chongster]

I've been pondering over this and would appreciate your views on this.

 

Assuming I have a sum of money sufficient for me to fully redeem my car loan. In light of the high inflation during this period, would it be wiser:

 

1. Hold onto the money and continue the loan till its full term since the real value of the instalments that you are paying to the bank will decrease over the years due to inflation.

2. Fully redeem the car and enjoy the interest rebate (after discounting any early redemption penalties).

 

Any advice? Thanks!

 

assuming you still have a healthy chunk of cash after you redeem, go for it.

[Akula]

Dun think so, from what I understand, Rule of 78 will be there if you redeem early, be it 1 year, 2.5 year, 3.3 years etc ( assuming loan 7 years ). Early penalty ( not all banks have, normally set at 20% ) normal locked in period ranges from 1-3 years generally. Also lastly if got cash rebate then normally will have to return the " unused " portion back to the bank.

 

All these are the general terms/conditions......it depends on the bank/finance and when a person got the loan, how much the loan one takes ( think the bigger onesmore often have the penalty ) thus these terms will vary......

Edited August 20, 2008 by Akula

[Xiao_bai77]

Below is the DBS calculation for early redemption formulae calculation from the web.

Do advice me if the calculation below is wrong.

 

Illustration 1

Suppose you take a loan of S$73,200.00 over 7 years at an interest rate of 2.50%. The computation would be as follows:

 

Total interest payable over 7 years

S$73,200.00 x 2.50% x 7 years = S$12,810.00

Monthly instalment

(S$73,200.00 + S$12,810.00) / 84 months = S$1023

 

Original Loan Amount= S$73,200.00,

Total Interest (based on illustration 1)= S$12,810.00

Total payable (principal + interest)= S$86,010.00

Less : instalment paid (S$1023.00 x 12)= (S$12276.00)

Less : Rebate of Unearned Interest

Using Rule of 78 method (less 20%),calculation from below formulae= (S$7543.90)

Total amount payable to bank to fully redeem your loan=$86010-12276-7543.90= S$66190.10

 

Formula for Rule of 78 Method (less 20%)

 

n (n + 1) 72 (72 + 1)

R = ------- = ----------- x TC x 80% = x S$12,810.00 x 80% = S$7543.90

N (N + 1) 84 (84 + 1)

 

Where:

R represents the interest charges rebate

n represents the balance loan period expressed in months

N represents the original loan period expressed in months

TC represents the total amount of interest payable over the loan period.

 

Therefore to redeem full load from bank is $66190.

Is there any other penalty if redeem early before 3 years other paying $66190 to clear the loan from bank base on above calculation.

[Xiao_bai77]

Just to add on, Above calculation is based on redeem after 1 year installments to bank.

On the 13th month to redeemp full settlement from bank.

[Silver_blade]

Agree. If you will still have a chuck of money after redemption...go for it.

[Jazzy28]

DBS has a different scheme nowadays but dunno whether is it standard across the board. They no longer using rule 78 for this new loan type.

[Pyramid_sg]

One of the bros has illustrated the calculations clearly. There is a penalty of rule 78 if you redeem the loan early. Some other banks have a tie down period of 3 years like Maybank. They will impose a 2% clawback if you redeem it earlier than 3 years. So if you are sitting on a pile of cash and the car interest rate is low, I would wait until the penalty period is over. Otherwise if you don't mind forking out the cash despite the penalties then go for it.

[Akula]

Your calculation is correct. Cos in the formula you already factor in the 20% penalty, ie { X 80% ). The Rule of 78 originally do not have the 20% penalty cos its formula already "penalise" the borrower already. There shld not be any other penalties after all this. Normally this is within the first 3 years of a 7 year loan, 5 years for a 10 year loan.

[Tkseah]

U strike Toto isit.. If so, redeem after pass lock-in period..

[Vincent_ltm]

not worth it.. seriously the interests is one of the lowest u can find in the market..

comparing to credit cards interests and etc....

 

most of the time is more than 5% per year

[Focusdude]

Hi,

 

Personally I would choose option 1. However, option 2 would be a better choice if:

 

a. you may succumb to the temptation of using the cash on-hand to buy something else that is not essential

 

and/or

 

b. you are not able to utilise the cash on-hand to generate returns at a higher interest rate than the effective car loan interest

 

Just my two cents worth.

 

I've been pondering over this and would appreciate your views on this.

 

Assuming I have a sum of money sufficient for me to fully redeem my car loan. In light of the high inflation during this period, would it be wiser:

 

1. Hold onto the money and continue the loan till its full term since the real value of the instalments that you are paying to the bank will decrease over the years due to inflation.

2. Fully redeem the car and enjoy the interest rebate (after discounting any early redemption penalties).

 

Any advice? Thanks!