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.

REPLY
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.