Requirement for Advertisements for Car Loans to Include Effective Interest Rate Calculation

Mr Ong Teng Koon asked the Minister for Trade and Industry whether the Ministry can consider requiring interest rates advertised for car loans to be calculated using the Effective Interest Rate method, which is based on the outstanding principal of the loan, instead of the Flat Rate method, which is based on the original principal of the loan.

Lenders which extend car financing on a hire-purchase basis are required to comply with the disclosure requirements under the Hire Purchase Act. This includes disclosing the Effective Interest Rate (EIR) to consumers in writing before they enter into a hire purchase agreement. Other information which must be provided include interest rates for overdue instalments and administrative charges. If these information are not provided prior to signing of the agreement, the agreement will not be enforceable.

In addition, banks, which provide the bulk of car financing today, are also expected to include the EIR in their advertisement of loan products, including car loans, as set out in the Code of Advertising Practice issued by the Association of Banks in Singapore.

We strongly encourage consumers to review the terms of car loan agreements carefully and assess their ability to meet the financial commitments before entering into any agreement.