Paying off car loans early to hurt less

[DarkLord]

Paying off car loans early to hurt less

 

A more even spread of interest charges over period of loan proposed

By Kelvin Wong?

 

AN OUTDATED way of calculating interest payments on car loans, which penalises borrowers for paying off loans promptly, looks set to be replaced.

In its place is likely to be a fairer repayment method that spreads interest charges more evenly over the loan period. This has been recommended by a task force set up to review the 35-year-old Hire Purchase Act.

 

Task force member Ng Yuen, a lawyer, who chairs the Consumers Association of Singapore education committee, told The Straits Times yesterday that a proposal will be sent to the Ministry of Trade and Industry (MTI) in about a month's time.

The existing Act governs cars that cost up to $55,000 (without a certificate of entitlement), and the task force wants a 'statutory rebate' clause to be abolished.

Known in the industry as the Rule of 78, this formula builds in a disproportionately large amount of interest into the early years of repayments.

For example, someone who takes a 10-year loan of $100,000 and pays it off in four years, gets a rebate on the remaining six years' interest. When calculated according to the Rule of 78, it means that the rebate for interest charges incurred in the remaining six-year period is less than if the interest had simply been pro-rated.

This is because more of the instalments were used to service interest payments than in lowering the principal sum owed.

The proposed new method is fairer because it spreads out interest more evenly. It means that borrowers will end up with smaller outstanding balances if they pay off the loan before it is due.

According to figures from DBS Bank, a car buyer who terminates his loan after four years will still owe $65,831, after taking into account interest and the rebate, going by the current market interest rate of 2.45 per cent for a 10-year loan.

For 10 years, that interest comes to $24,500. This is worked into the instalments such that much of the initial repayments do not reduce the principal but just pay the interest.

The task force recommends calculating interest each month based on what's left of the sum borrowed. This would result in the buyer owing some $422 less.

No rebate would apply since the buyer pays interest only up to the point when he terminates the loan.

With interest rates so low now, the difference may not seem like much. But if interest rates rise, the change will make more difference.

Also, if borrowers are not penalised for terminating car loans early, they may be prompted to refinance with banks or finance companies which offer them better deals.

Whether the change will create a buzz in the industry remains to be seen.

'Demand for cars is more or less still controlled by the quota, not so much on car loan packages,' said Mr Jeremy Soo, DBS' managing director for consumer banking (secured loans).

MTI said, when contacted, that it would put up the task force's proposed amendments for public consultation.

It plans to table amendments in Parliament before the end of the year.

 

http://straitstimes.asia1.com.sg/topstorie...,250625,00.html? - Link

 

Good news for car buyers?

Edited May 13, 2004 by DarkLord

[Mikevpower]

which bank in singapore offer Car Refinance?

[Leepee]

The new car loan interest rates may have to raise if this change were to implement.

The lenders will still die die want to make the 'same' amount of interest profit from the same amount of loan as now.

 

If there is no Rule78, then the loan contract will have to impose a special penalty clause of minimum years before the loan can be redeem, can be 3-7 or even 10 years! LPPL.

 

Some may say that 2.8% interest when calculated for a 7 years $50k loan (2.8%x7x$50k) is unfair as each year down the road the amount owed is being reduced and therefore the 2.8% should be calculated on the reduced figures instead of the original $50k.

 

But this is the easiest and most convenient way to present a car loan to all buyers.

 

Like I say, the bank can just increase the interest rate to 4.8% and use the reducing capital method of calculation to satisfy those who think its more fair.

 

LPPL in the end for car buyers! It will cost more for those who are not able to redeem their loans early.

[Nikolaiski69]

The "alternative" that we're talking about is your EIR (effective interest repayment) monthly rest right?

[Bugsbunny]