Forum: Review how interest is charged for car loans
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I refer to the Forum letter “ Car loans: Bad situation worsened by lucrative bank commissions
The certificate of entitlement for my car will expire in April 2026, so I decided to purchase an electric vehicle to enjoy the 40 per cent rebate available till the end of 2025.
The agent informed me that I had to take a car loan of at least $60,000 at an interest rate of 2.48 per cent for a minimum of five years, or incur a $3,000 penalty. I was also told that the loan could be redeemed after 18 months without penalty.
However, when I reviewed the loan agreement, I discovered that the Rule of 78 was applied. This is an accounting method for calculating interest on loans, with a higher interest in the earlier months of the loan, causing borrowers to pay more interest initially and less over time.
For a $60,000 loan at 2.48 per cent over five years, the total interest payable is $7,440. If I redeem the loan after 18 months, the interest payable is still $3,672.
This method is unfair to consumers because it allocates most of the early repayments towards interest rather than the principal despite the borrower using the funds for a shorter period.
Most consumers assume interest is charged evenly over time. The Rule of 78 hides the true cost structure and benefits the bank disproportionately. It undermines the principle that interest should be charged only for the actual period the funds are used.
This practice should be reviewed to ensure fairer treatment of borrowers. Singapore should mandate a reducing-balance interest system for car loans. This reform would enhance transparency and align with fair lending principles.
Ng Sout San
