I initially thought that consumers will be able to pay much lesser interest to the finance companies for car loans due to the reduction in car loan tenure from 10 years to 5 years.
Unfortunately, the banks have already started to increase their interest rates to reflect on the shorter loan tenure. One bank has increased their interest rate from 1.88% to 3.25%.
So while the absolute amount in interest payments will be lesser, but in reality, the effective interest rate is actually going to be much higher due to the shorter loan tenure.
Suppose you take a loan of S$50,000.00 over 5 years at an interest rate of 3.25%. The computation would be as follows:
If the loan was at 1.88% for ten years,
Effective interest rate works out to be around 3.6% p.a.
Hi Martin, how do you calculate effective interest rates?Reply