Here's what to look out for in a car loan

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By design, our taxation structure has been made to disincentivise car ownership. That hasn't stopped up to 11 per cent of our population from buying their own set of wheels though. 

Chances are that the bulk of that aforementioned group would have had to apply for some kind of financial assistance, in the form of a car loan, to purchase their vehicle. This is a highly lucrative subset of the financial industry locally, no doubt aided by the artificial inflation of car costs here.

There are many ways one can go about obtaining a car loan, and not all car loans are created equal. Making an informed decision on your choice of financing, therefore, can really affect the total amount of dosh you'll have to spend in the long term.

With that being said, just what do you have to keep in mind before pulling the trigger and landing a car on your figurative drive?

A refresher on the MAS regulations

To keep Singaporeans from drowning in debt, restrictions have been put in place to ensure car buyers can manage their monthly payments. Essentially, one will only be able to borrow a certain percentage of the total value of the car. Cars with an Open Market Value (OMV) of less than or equal to $20,000, will need to have a downpayment sum of 30 per cent. Those that have OMVs north of $20,000 will be subject to an upfront payment of 40 per cent.

There are ways around these restrictions of course, but they will incur hefty monetary penalties.

What should you look out for?

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You shouldn't shop for a loan based solely on the monthly repayments. This is because dealers and institutions can tailor tenures, interest rates and even downpayment amounts to meet your requirements. 

Whilst seemingly a non-issue, this subtle difference can mean significant total repayment sums over the duration of your tenure. 

The mathematics

In tangible figures, let's assume you are after a brand-new economy saloon that costs $150,000, with an OMV that is less than $20,000. With these figures in mind, know that according to MAS guidelines, authorised financial institutions will only be able to loan you a sum of up to $105,000.

Let's also assume that the person in question makes the average Singaporean monthly salary of $4,680 (based on 2021 statistics), and owns a new three room BTO flat, with a monthly instalment of about $1,500. With the TDSR guidelines, you'd only be eligible for a loan of about $1,300.

Personal loans

Banks will only loan you up to $66,500 in an ideal scenario - you'll need $83,500 in cash to pay off the rest of the car. At the 6.5 per cent Effective Interest Rates (EIR) that the banks have quoted for, you're looking at $1,040 worth of actual loan payment, with the remaining $260 being set aside for interest.

Another advantage of using this is your ability to outright own the car, as you'll essentially be paying in full with the loan sum dispersed to an account of your choice.You will be paying $1,468.54 a month, for a total interest sum of $21,612.50, and a final repayment amount of $171,612.50.

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Dealer in-house loans

These do not follow any specific structure or guidelines, and it is really up to the respective dealer to quote their own interest rates and tenures. Most reputable dealers adhere to MAS guidelines, with seven-year durations that are common, up to 30 per cent down payment, and you can expect to pay an interest rate of up to 2.98 per cent.

Why would you use this instead of a bank loan with a lower interest rate? Well, firstly, this is the path of least resistance, and paperwork can be processed much more quickly, and secondly, in-house loans may not negatively impact your TDSR. This also means that you may be able to get a 70 per cent loan sum that you might not otherwise have been eligible for if you do not have the paycheque for it.

Excluding your down payment, you'd be paying $1,510.75 in monthly repayments, for a total of $126,903. $21,903 will be paid as interest. The total cost of your car including the $45,000 upfront payment is $171,903.

Bank/financial institution loans (governed by MAS)

Through this avenue, you'd only be able to borrow up to $105,000. On a seven-year tenure and at 2.28 per cent, you'd be looking at a monthly instalment of close to the maximum sum you'd be eligible for, after factoring in the other loan commitments you'll have to sustain.You'll be looking at a monthly repayment of $1,449.50, for a total of $121,758. The total interest paid will add up to $16,758, for a total car cost of $166,758 over the entire COE duration.

A Little TLDR

For ease of reference, we've put the figures in the hypothetical scenario in a handy table below:

 
The loan breakdown
  Personal loan Dealer loan Bank loan

Loan sum

$66,500 $105,000 $105,000
Monthly repayment $1,468.54 $1,510.75 $1,449.50
Total interest paid $21,612.50 $21,903 $16,758
Total amount paid $171,612.50 $171,903 $166,758

Other hidden costs

Car ownership isn't only about paying off your monthly instalments. There's a need to factor in running costs (fuel/electricity, maintenance), as well as parking fees. There are ways to make car ownership more affordable, though do be prepared to lose out on opportunities as a result of having your funds being tied up in a car!

ALSO READ: Buying a car? You need to be earning at least $8,850 first