What to know before redeeming your car loan

By Gwendoline Tan

If you’ve only got a minute:

• Before you can transfer ownership of a car, you must fully pay off your existing car loan.
• When you redeem your car loan early, you will receive an interest rebate which is calculated with a set formula.
• Early loan redemption often comes with fees and charges.
• Weigh the costs and benefits of early redemption before making an informed decision.

Looking to sell your car?

Whether you are upsizing to a more family-friendly vehicle or just making room for something new, it is important to understand the costs involved, especially if you have an existing car loan. This is so as car loans are not transferrable, which means you will need to pay off your outstanding loan amount before you can transfer the ownership of the car to another person.

This often comes with early redemption fees and charges. To help you better understand how this works, here is an example.

Calculating your outstanding balance

Let’s assume you took up a S$60,000 DBS Car Loan with a 5-year loan term, and after 25 months of instalment repayments, you decide to pay off your loan early.

The first step is to work out the outstanding balance on your loan.

Loan principal amount = S$60,000
Original loan period = 5 years (60 months)
Interest rate = 2.5% per annum (p.a.)

As you can see, the total amount outstanding on your loan is S$39,375.

But this is not the final amount payable as you still need to account for the interest rebate and 2 fees for early repayment – one for the interest rebate and another for the total financed amount.

Find out more about: DBS Car Marketplace

1. A 20% fee on the interest rebate

When you take out a car loan, you enter into an agreement with the bank stating that must repay both the loan amount and interest over the full term of the loan. However, if you choose to pay off the loan early, you will receive a refund on part of the interest, called an “interest rebate”.

For early repayment of DBS Car Loans, a 20% early redemption fee is applied to the interest rebate.

The interest rebate is calculated using a preset formula called the “Rule of 78”.¹

The “Rule of 78” is a loan interest calculation method used by most banks to structure early repayments. Instead of evenly distributing interest over the loan duration, this rule front-loads the interest. This results in you paying more interest in the earlier months of your loan and less as time goes by. This makes paying off the loan early less advantageous as most of the interest would have been paid upfront.

Why 78? That’s because a 12-month car loan starting in January would have the interest payments falling in the proportions: 12+11+10+9+8+7+6+5+4+3+2+1= 78.

So, the amount of loan interest paid for March would be 10 times that paid in December. And when you add the proportions together you end up with 78, which explains the name of the rule.

Using the same example as before, let’s calculate your interest rebate.

The total interest rebate is S$2,581.97 and the early redemption fee of 20% is S$516.39, payable to the bank.

2. A 1% fee on the total financed amount

The second fee 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.

In this example, the 1% applied to the loan amount of S$60,000 is S$600.

What do I pay?

The balance payable when you redeem your loan early is calculated by adding up all amounts owed to the bank including fees and charges, then subtracting the interest rebate you are receiving.

Note that the final balance payable may vary if you received a rebate when you first took out the loan, so check with your bank for the exact redemption amount.

Read more: Buying second hand car in Singapore

In conclusion

Paying off your car loan early may offer the benefit of clearing your debt sooner, but it is essential to weigh the costs and benefits involved.

While you’ll save on interest by redeeming the loan early, you’ll also need to account for penalties including the 20% interest rebate charge and the 1% fee on your total financed amount.

Before deciding to sell your car and redeem your loan early, consider whether it is the best financial decision for you. If you don’t urgently need to settle the loan, exploring other options may be a more beneficial route in the long run. This can include investing your savings or clearing other unsecured debt, which tends to have higher interest charges.

It is prudent to always check with your bank for the exact amount you owe and seek clarification on any questions you may have.

Read more: Get more interest out of your idle cash
Find out more about: Fees and charges applicable for early redemption of a DBS Car Loan

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Source:

¹The Association of Banks in Singapore, “Car financing, what you should know”, retrieved 21 May 2025.

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.