Tuesday, February 02, 2010

Car loan for 60 months

Dear Mr. Tan,
I am responding to your post on your blog - which is always a great pleasure to read and to follow, by the way.

Date of offer: July 2009
Financial Institution: (insurance company)
Amount of loan: $55,000
Purpose of loan: car loan
Number of repayments: 60 months
Monthly repayment: $1,031 for 59 months, and $1,048 for the final month.

The interest rate which they quoted me was 2.5%, and I would like to find out what is the effective effective interest rate.

The total amount that you have to repay is $61,877. After deducting the loan of $55,000, you are paying interest of $6,877 for the 5 years. This works out to a FLAT interest rate of 2.5% per year.

However, as the loan reduces over the period of 5 years, the effective interest rate is higher, at 4.73% per year. I consider this interest rate to be acceptable for a 5 year loan.


Anonymous said...

Hi Mr. Tan,

Can you advise how to get the effective interest rate of 4.73%?

Thanks in advance.

Tan Kin Lian said...

I use the Excel Function called Rate.

You have to enter the following:
number of periods: 60
loan, i.e. PV $x
FV $0
monthly repayment $y
This will compute the interest rate per month.

Multiply it by 12 to get the annualised rate.

Ask someone who is knowledgeable to show you how to calculate it on Excel.

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