Early redemption amount for car loans in Singapore is calculated based on the Rule of 78, which is a method of allocating the interest charge on a loan across its payment periods. More interest charge is allocated to earlier payments compared to the later ones. Because of this, paying off a loan early will result in the borrower paying more interest overall.
Because the banks need to cover their administrative costs and commission already paid out, car owners who early redeem their loans are further penalised with a charge of 20 percent of the unpaid interest; the bank will only rebate the borrower 80 percent of the unpaid interest instead of the full sum.
Banks usually further charge an Early Settlement Penalty, but in our below example, we will ignore this portion.
When doing an early redemption on a car loan, the amount to pay is:
Initial loan amount + total interest - instalments already paid - 80 percent of unpaid interest