Rows of used cars for purchase
19 Feb 2019

What to know before redeeming your car loan

Planning to sell your car? Perhaps you’ve grown out of your sporty two-door coupé and decided you need a bigger, more powerful drive to shuttle the family around. If you have an existing car loan and plan to sell your car, you will need to fully pay off your loan before transferring the ownership to the next buyer.

Other than the outstanding instalments, there are fees and charges that may apply to you if you redeem your DBS Car Loan early. Let’s walk through the sums.

Step 1: What is your outstanding instalment amount?

Calculate the outstanding loan amount

Assume that you have a 5-year loan of $60,000.00 and you want to pay off your loan early after 25 months (i.e. after 25 instalments have already been paid):

Loan amount = $60,000.00
Loan period = 5 years originally
Interest rate = 2.50% p.a.
Total interest payable = (2.50% × 5 years × $60,000.00) = $7,500.00
Total amount owed = ($60,000.00 + $7,500.00) = $67,500.00
Instalments already paid (for 25 months) = ($67,500.00 / 60) × 25 = $28,125.00
Outstanding instalment amount = $67,500.00 - $28,125.00 = $39,375.00

Step 2: 20% of the interest rebate will be charged

20 percent of the interest rebate will be charged

Next, you need to calculate the interest rebate on your remaining loan period. Of this, 20% will be charged by the bank as a fee for early redemption.

The formula to calculate interest rebate is:
(n[n+1] ÷ N[N+1]) × Total Terms Changes
n refers to unexpired loan period in months;
N refers to original loan tenure in months;
Total Term Charges refer to the total interest payable

Based on the scenario above, interest rebate based on remaining 35 months*
= (35[35+1]) / (60[60+1]) × $7,500 = $2,581.97
20% bank fee = $2,581.97 × 20% = $516.39

Step 3: Add a 1% charge of the total financed amount

Calculate the balance when you redeem your loan early

Finally, there is a 1% charge on your total financed amount.

The total financed amount is calculated by taking the total cash price of the vehicle (including GST, the accessories, other related fees, expenses and charges) and deducting the total deposit including cash, allowance/trade-in for a used car model.

The balance payable when you redeem your loan early would then be
= Outstanding instalment amount - 80% of interest rebate + 1% of total financed amount
= $39,375.00 - ($2,581.97 - $516.39) + $600.00
= $37,909.42

Do note that the final amount payable might vary if you received a rebate for your loan, so check with your bank on the exact loan redemption amount you have to pay.

Should you do an early redemption?

While there are savings to be gained from doing an early redemption, you would also be incurring a penalty for doing do. If you are not selling your car and do not have to do an early redemption, you could consider other investment options in order to realise a gain that is above these potential savings.

To understand more, read: Fees and charges applicable for early redemption of a DBS car loan.