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Tuesday, January 13, 2015

How to Calculate Car Loan(Hire Purchase Loan)?

Planning to buy a car or already paying car installment? Well this is what you should know about your car loan! Apart from accounting/finance/bank folks, most of us may not know Rule of 78

Rule of 78 is the allocation of interest charge 
on a loan throughout its payment periods. 

It is commonly used to calculate the interest rebate or redemption sum (early settlement). Rule of 78 applies in Hire Purchase Loan or more commonly known as car loan.

Let's start with the Rule of 78

As usual, giving example is the best illustration.
Example 1
Hire Purchase Loan/Car Loan = 25,000
Repayment Period = 1 year = 12 months
Interest Rate = 3% p.a

Yes, it is a direct calculation for the interest of car loan:
25,000 X 1 X 3% = 750
Hence, total car loan will be principal + interest:
25,000 + 750 = 25,750
So, monthly installment will be:
25,750 / 12 = 2,146

But, do you know what's the proportion that paid to interest?
This is where Rule of 78 comes into the picture!

Rule of 78 Hire Purchase Loan Car Loan

Which explains why it is call Rule of 78!

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78

Of course, usually the repayment period would not be that short.
The above case is just to show the "78" in Rule of 78.
So next, same car, but with longer repayment period, let's say 7 years!

Example 2
Again, it is a direct calculation for the interest of car loan:
25,000 X 7 X 3% = 5,250
Hence, total car loan will be principal + interest:
25,000 + 5,250 = 30,250
So, monthly installment will be:
30,250 / 84 = 360

Rule of 78 Hire Purchase Loan Car Loan

In this case, there's no longer the number 78 in Rule of 78!
But calculation still the same, except with 7 years or 84 months you will get 3570.

So how to get 3,570?

So the interest trend in Rule of 78:

How to Calculate Car Loan(Hire Purchase Loan) Rule of 78

The amount of interest is highest in the beginning 
and reduces over the loan period.
While principal increases throughout the period.

How does it affects me?
Well, it doesn't affect unless you are going for early settlement or repayment.
Hence, it is important to know which debt to settle first when you got a lump sum.
Subsequently, you could also check with your financial planner!
Looking for a financial planner? Contact me!


  1. Thanks for sharing this, it is great~ =)

    1. Well if you think it is great, then you should share it out to your friends as well! ;)

  2. Thank you for letting us know how to calculate car loan as I still consider to purchase a new car but did not how the loan been calculate.a useful information.

    1. well if you need help, you could always email me or pm me! ;)

  3. Expert on calculations.. Well, guess we really need to consider the interest if we really wanna purchase the car..

  4. Good and informative post. You explain good calculation process.

    1. Thank you! Share it out to your friends too!

  5. Thank you for sharing such great information. It was very informative and has help me in finding out more detail about Car Loan!

  6. Thank you for sharing. It is informative and I’m searching more details on car loans to know more about this field and want to understand the basics of banking services too.

  7. I was looking for a formula to calculate Car Loan but most of the links took me to a calculator page. Appreciate the post. The simplest formula to calculate car loan is Total Interest = [Interest rate/100]*Total Loan Amount*Total Loan Tenure (years)


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