Is $0 down payment car purchase a good idea?

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Everybody knows how expensive it is to own a car in Singapore. It doesn’t help that car-related things aren’t the most straightforward or easiest to understand. Truly, there are a thousand and one things to think about right from how you’re going to finance the car, road tax, car insurance to the various components that make up the purchase cost of the car. 

When it comes to financing a new car, consumers have options. They can get a car loan from the bank the traditional way or go to financing companies. There are, of course, pros and cons to each.

Intrigued by the idea of driving away a new car without having to fork out any money upfront? Read on to find out why there’s more to a $0 down payment car than meets the eye… even though it does sound really nice in theory. 

How much can you borrow when taking a car loan?  

Banks are obliged to follow regulations set by the Monetary Authority of Singapore. For car loans extended to consumers, the maximum loan tenure is seven years. 

The loan amount you may be eligible to borrow depends on the open market value (OMV) of your vehicle. For the uninitiated, the Loan-to-Value (LTV) ratio is the loan amount expressed as a percentage of the car’s purchase price (including taxes and COE). 

  • Motor vehicle with OMV ≤ $20,000: maximum LTV is 70 per cent
  • Motor vehicle with OMV > $20,000: maximum LTV is 60 per cent

However, it is up to the bank to decide whether or not to extend the maximum LTV to you. The bank will take into consideration all your other debt obligations before determining the amount of car loan you can actually qualify for. Your car loan has to comply with Total Debt Servicing Ratio rules.

As you can imagine, a car loan will require you to fork out cash on your end. While you have to shell out more money upfront thanks to the higher down payment necessary to seal the deal, take heart that the interest rates are lower. This translates to a lower sum borrowed.

Is a $0 down payment car in Singapore even possible?

$0 down payment cars are possible because of finance companies that partner directly with car dealers. They offer attractive $0 down payment and $0 drive-away packages to potential car buyers in the name of making things affordable and accessible to all. 

As a car buyer, you are technically borrowing 100per cent from the finance company that’s taking on the risk to lend you the entire sum. This is how you can buy a new car without having to deposit a down payment. 

Implications of going the $0 down payment route

While it certainly sounds like a dream to drive away with a new car without paying anything upfront, the reality is far from that. These finance companies aren’t charity organisations — they make money by charging very high interest rates, already carefully woven into the total price quoted to potential customers. 

Your new car will be more expensive in every way, although it is arguably the easiest way for you to own a car – especially if you don’t have the funds to do so at that point in time. Expect higher monthly repayments and an overall larger bill for your new car.  

ALSO READ: News: You can now get pre-approved car loans before going for that test drive

If you’re unable to service the loan halfway through, you’ll lose even more at the end of the day when you have no choice but to sell the car. Those who find themselves in such a precarious situation often have to cough up a tonne of cash, due to their outstanding loan from the finance company and super high interest charges.

Here’s a quick illustration to help you get a better sense of why things are the way they are: 

Assume you take up a 3.5 per cent p.a. 10 - year loan, pay $0 down payment for your $100,000 car that has a PARF value of S$3,500

Your Costs Calculations
Interest incurred $100,000 x 3.5 per cent p.a. x 10 years = $35,000
Total cost $100,000 + $35,000 = $135,000
Yearly cost of loan S$135,000 / 10 years = $13,500
Monthly instalment S$135,000 / 120 months = $1,125

You then sell your car after just three years. Let’s assume your car has an annual depreciation of $7,000. 

Selling Car: Things To Care About Calculations
Trade-in price ($7,000 x 7 remaining years) + $3,500 PARF Value + $5,000 token sum from dealer = $57,500
Outstanding loan (before Rule of 78)  $13,500 x 7 = $94,500 
Amount you’ll have to fork out to clear loan $94,500 – $57,500 = $37,000

Who might be the ones willing to accept the high cost and commitment associated with $0 down payment cars? Those who are in desperate need of a car, such as people with young children, elderly and/or less physically mobile members in the family. 

To consider: Legal alternative with low upfront fee 

If you need but can’t really afford a car just yet, car leasing could be a feasible option if you aren’t interested in taking ride-hailing services all the time and you have inadequate savings to pay for the car’s down payment. 

There are many car leasing companies (e.g. VINCAR, Dickson Auto Solution, Bolt Car Leasing, Dream Car Leasing, Carro) that offer this option regardless of whether you’re looking to lease a brand new or used car. However, make sure you crunch the numbers — the monthly costs for leasing a car could actually be higher than if you were to buy a car!  Determined to own a car?

ALSO READ: Is it finally worth it to buy an electric car in Singapore?

Among the laundry list of things, car insurance is non-negotiable. It is compulsory if you would like to drive a car in Singapore. Learn more about and compare the various comprehensive car insurance plans offered by the various car insurance providers in Singapore to find the best one for your needs and budget. 

This article was first published in SingSaver.com.sg.