Car loan interest in Singapore: flat rate, effective rate and early settlement

Short answer: Singapore car loans are quoted at a flat rate, which charges interest on the whole loan for the whole term. The effective rate, which is how a mortgage or savings rate is quoted, is nearly double: a 2.5% flat rate over five years is about 4.7% a year effective. And because interest is front-loaded under the Rule of 78, paying a car loan off early saves less than most people expect.

Flat rate vs effective rate

With a flat rate, interest is worked out once, on the full amount you borrowed, for every year of the loan, even though you are paying the loan down every month.

With an effective rate (also called the effective interest rate, or EIR), interest is charged only on what you still owe, so it falls as you repay.

Take a $42,000 loan at 2.5% flat over 5 years:

Interest = $42,000 × 2.5% × 5 = $5,250

Monthly = ($42,000 + $5,250) ÷ 60 ≈ $788

The same monthly payment, worked out the way a mortgage is, is an effective rate of about 4.7% a year. As a rule of thumb, the effective rate is a little under double the flat rate:

The flat rate is not a trick, and it is how every lender in Singapore quotes. It just means you should compare car loans with each other, not with your mortgage.

How to compare two car loans

• Compare flat rates for the same loan length. A lower rate over a longer term can still cost more in total.
• Look at the total interest, not only the monthly figure. Over 7 years at 2.78% flat, the $42,000 loan costs about $8,170 in interest; over 5 years at 2.5%, $5,250.
• Ask about the early settlement terms (below), especially if you might sell or upgrade within a few years.
• Check the loan length the car allows. MAS caps car loans at 7 years, and lenders will not lend past the car's COE. See how much downpayment you need for the loan limits.

What paying off a car loan early really costs

Most car loans work out what you save by settling early with the Rule of 78. It assigns more of the interest to the early months of the loan, so by the time you settle you have already paid a larger share of the interest than the calendar suggests.

On top of that, lenders commonly:

• keep a share of the interest you would otherwise get back, often 20% of the rebate; and
• charge a prepayment fee, often 1% of the original loan, or ask for notice.

Terms differ by lender, so check your own loan agreement.

An example. The same $42,000 loan at 2.5% flat over 5 years, settled after 2 years:

• Instalments paid so far: 24 × $787.50 = $18,900
• Still owed on paper: $47,250 − $18,900 = $28,350
• Interest not yet "earned" under the Rule of 78: about $1,911 (a straight-line split would say $3,150)
• Rebate after the lender keeps 20%: about $1,529
• Plus a 1% prepayment fee: $420

To settle: $28,350 − $1,529 + $420 ≈ $27,240

So settling early saves about $1,100 here, well short of the $3,150 of interest left on paper. It is still often worth it when you sell or upgrade, but it is worth knowing the real figure first: ask your lender for a settlement letter.

Ways to pay less interest

• Put more down. A smaller loan means less interest at any rate.
• Choose the shortest loan you can comfortably afford. The monthly payment is higher, but the total interest is far lower.
• Pick a car with enough COE left for the loan length you want; a car with little COE left forces a short, expensive loan.
• Compare the cost per year, not only the price. Cars with a low depreciation per year usually cost less to own overall.

Every car on our site shows the longest loan it can have and what it comes to a month. Work out the monthly payment for any of our cars, or ask us and we will compare the options with you before you come in.

Sources

Checked on 21 October 2026. Rates and fees vary by lender and change often, so check them again for any decision that depends on them. The figures above are illustrations, not quotes.

• MAS: Motor vehicle loans
• DBS: Redeeming your car loan
• Standard Chartered: Auto loan booklet