Well, I believe our banks are using " the sum of digit method " ( rule of 78 ) to compute the refund for car early settlement. (plse check with banks for further details )

By using this method , a bulk of total interest is earned in the earlier years. Let say you have a car loan for 6 six years, ( rough estimate only) the bank would have earned up to about 75 % ) of total interest by end of third year.

Though you may have half the instalments left ( 3 more years to go ), bank earns up to 75 % interest already .

Formula for calculating the unearned interest:

u = f X k(k+1)/n(n+1) u = unearned interest; f = total agreed finance charges; k = number of months paying off early; n = total term of loan in months


Please take note that US had banned the use of Rule of 78 for car loans with 5 years tenure and below.


If you have a flexi housing loan, may as well park your money here.

Just my personal opinion only.

Happy Planning.

This post has been edited by SKY 1809: Jul 26 2009, 04:46 PM

Believe it or not, the most ideal car loan is for one year duration. The Flat rate interest would be closer to the Reducing term method.

But you have to make sure it is a year HP agreement, not a 6 years HP agreement.

Who ever grants you such a loan, that banker officer might get lecturing from his /her senior.

This post has been edited by SKY 1809: Jul 26 2009, 03:56 PM

http://www.bankrate.com/brm/news/auto/20010827a.asp