Self Assessment Problems: Credit Management

1. In August, Mr Lam purchased $5,000 worth of goods using his UOB Visa card.
The following month, he received his credit card bill dated 5 September with payment
due by 25 September. He is required to pay 5% of the bill or $50 whichever is higher by
the due date. Mr Lim paid the bank $3,000 on the due date. On 27 September, he
charged $6,000 to his card to buy a plasma TV. Assume the interest rate is 2.5% per
month.

a) State the amount he owes the bank when payment is due in October.

b) What advice would you give to Mr Lam?

2. At a recent car road show, Mr Low spotted a new Suzuki hatchback going for
$110,000. The bank is able lend 60% of the car price at 3.1% per annum for a 5-year
flat-rate loan. What is the monthly repayment and total interest payable for this loan?

3. You plan to get a car loan of $70,000 for 5 years. You are looking at two loans.
The first loan is a flat rate loan with a fixed interest rate of 3.3% per annum. The second
is a monthly rest loan with a flexible interest rate. The monthly installment for this loan
is $1,340.

a) What is the EIR of the flat rate and monthly rest loan assuming interest rates stay
constant? Express the EIR on a monthly compounding basis.

b) Would you choose the monthly rest loan over the flat rate loan if the interest rate for
the former rises to 6.25% per annum next year and stay at that level for the remaining
term?

4. Two years ago, Mr Tan obtained a 5-year car loan of $40,000 from his bank at an
annual interest rate of 2.5%. Now, he wants to redeem his loan. The bank calculated the
redemption amount using the Rule of 78. Mr Tan did not understand the calculation and
asked for clarification. The bank explained the calculations and also informed Mr Tan
that this was stated in the terms and conditions of the hire-purchase agreement. In reply,
Mr Tan said that he assumed all car loans were based on the monthly rest method of
computing interest.

(a) What does this story tell you about car loan interest computations?

(b) How much did Mr Tan have to pay the bank to redeem the loan?

(c) Compare the EIR of this loan with a monthly rest loan with interest rate of 4.6%.

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5. A distributor of luxury cars has introduced a new loan to promote its latest model.
Borrowers pay a lower monthly installment than a standard monthly rest loan, but must
make up by making lump sum payment at the end of the loan term. The car costs
$120,000 inclusive of COE Based on a 60% loan quantum and a 5-year loan tenor, the
monthly installment is $1,000 and the final lump sum payment is $25,000. Other banks
are offering flat rate loans at interest rates of 3%.

a) How would you classify this loan?

b) What is the effective interest rate for this loan? Compare this with the effective
interest rate of a flat rate loan.

6. One year ago, Mr Chan obtained a housing loan of $480,000 from UOB. The
terms of the loan is as follows:

Tenor: 20 years
Interest rate: 2% p.a. (first year)
Lock-in period 3 years from date of loan disbursement
Penalty for loan redemption
within lock-in period 1.5% of outstanding loan amount

The loan also provides a cash rebate of $8,000 and legal fee subsidies of $2,000. These
amounts must be returned to the bank if Mr Chan fully redeems the loan within the lock-
in period. If Mr Chan decides to redeem his loan now, how much does he need to pay the
bank?

7. Mr Goh has just sold his condominium to buy a resale HDB flat. However, he
realized that the HDB transaction will complete two months ahead of the condominium
transaction and he is short of $50,000 payable to the seller of the HDB flat. He has
approached Standard Chartered Bank for a two-month bridging loan for this amount. The
loan is described as a discount loan with interest rate of 6% p.a. Mr Goh is required to
pay the principal and interest when he receives the condominium proceeds in two months.

What is a discount loan? If Mr. Goh applies to Standard Chartered Bank for $50,000,
how much interest will he have to pay the bank? What is the true cost of this loan (in
percent per annum)?