How to Calculate Your Car Loan and Personal Loan Settlement Amount

Four Methods:Example Car Loan ScenarioDetermine the Total Amount Already RepaidFind out the Total Interest Payable Using Sum of Digits MethodBring It All Together

The calculation method for car loan / auto loans early settlements are not as straightforward as mortgage loans. The interest portion for early settlements are calculated using the Rule of 78 a.k.a. Sum of Digits method. This article shows you how to calculate your settlement amount.

Method 1
Example Car Loan Scenario

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    You take a $10,000 car loan, to be repaid monthly over 2 years, at an interest rate of 10% per annum, calculated on a simple flat interest basis. You have paid up 8 months of the loan.
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    This works out to the following:
    • Installment = $500 per month
    • Total Interest Payable Over Entire Tenure = $2,000
    • Total Repayment Over Entire Tenure = $2,000 + $10,000 = $12,000

Method 2
Determine the Total Amount Already Repaid

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    To determine the total amount already repaid
    • Total Amount Already Repaid = Monthly Installment Amount * No. of Repayments
    • = $500 * 8
    • = $4,000

Method 3
Find out the Total Interest Payable Using Sum of Digits Method

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    Add up all the number of months using progression. This will be the Denominator (D)
    • 1 + 2 + 3 + 4... + 24 = 300
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    Where x = the number of installments already paid, add up (x + 1) number of months using progression, but in reverse order. This will be the Numerator (N)
    • 24 + 23 + 22... 16 = 180
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    Total Interest Payable = N / D * Total Interest Payable Over Entire Tenure
    • Total Interest Payable = 180 / 300 * $2,000 = $1,200

Method 4
Bring It All Together

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    Settlement Amount = Borrowed Amount + Interest Portion - Total Installments Paid
    • Settlement Amount = $10,000 + $1,200 - $4,000 = $7,200

Tips

Warnings

  • Note that for Step 3, the numerator could be a progression sum of up to (n) or (n+1), depending on the formula used by the bank. In this example, (n+1) was used.

Article Info

Categories: Mortgages and Loans