Mr. Tan bought a brand new RM 100,000 car and financed it with a 10% deposit of RM 10,000 and a RM 90,000 car loan where his loan tenure is 5 years and his flat interest rate is 3% per year. Hence, Tan’s monthly car loan installment is RM 1,725.
Tan has been paying his car loan installments promptly without fail for 3 years.
Then, he wishes to settle his car loan in full as he thought that he would save as much as 2 years worth of interest costs totalling RM 5,400.
Tan figured that he had already paid off RM 54,000 in loan principal and thus, is expecting to pay RM 36,000 to settle his car loan in full.
So, off he goes to the bank to visit his banker.
To his dismay, his banker told Tan that he needs to pay RM 39,186.89, if he likes to settle his car loan in full. Instead of saving RM 5,400, Tan would only manage to save RM 2,213.11 in interest costs, a far cry from what he had expected.
The answer lies in the Rule of 78. Here, I explained what is the Rule of 78, how it affects our car loans and personal loans, and also, very importantly, how we can make better financial decisions with it.
- What is the Rule of 78?
- How the Rule of 78 affect Car Loans & Personal Loans, but not Housing Loans
- How to Calculate the Outstanding Loan using the Rule of 78
- How much does it costs you to pay off flat-rate loan early