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:
- Total interest payable over 5 years = S$50,000 x 3.25% x 5 years = S$8125
- Monthly installment = (S$50,000.00 + S$8,125.00) / 60 months = S$968.75
If the loan was at 1.88% for ten years,
- Total interest payable over 10 years = $50,000 x 1.88 x 10 = $9400
- Monthly installment = (S$50,000.00 + S$9400) / 120 months = S$495
Effective interest rate works out to be around 3.6% p.a.