Don’t Fall For These 4 Car Financing Traps

Car prices in Singapore are the highest in the world. A recent survey by the Economist Intelligence Unit (EIU) found that the cost of a family car in Singapore was USD153,000. The comparable price in Paris was USD37,800 and only USD22,000 in New York.

Why are cars in this country so expensive? Mainly, government duties and taxes are to blame since the Additional Registration Fee can raise the price of a car by 100% to 180%. Every car owner also needs a government-issued Certificate of Entitlement which can drive prices up by S$40,000 to S$50,000 or even more.

As a result of these high car prices, an increasing number of Singaporeans are opting for car loans to finance their car purchases. A study by the Credit Bureau Singapore found that in 2016, 76,942 new motor vehicle loans were made by the bureau’s member financial institutions. This number reflected a growth of 25.6% over the previous year, and represents 88% of all cars sold in Singapore for that year.

However, car financing can be a complex subject and borrowers could benefit by keeping some of the following points in mind when they are shopping for a car loan.

1. What percentage of finance should you take?

Monetary Authority of Singapore (MAS) rules allow you to borrow up to 70% of the purchase price of a car if its open market value is less than S$20,000. For more expensive cars, the permissible percentage is lower at 60%. Open market value refers to the original price of a car, and excludes certificate of entitlement charges, additional registration fees, and other government levies.

But it may not be advisable to borrow the maximum amount that the lender is willing to provide. Why is that? Remember that your loan amount determines your monthly instalment. A larger loan will lead to a bigger liability every month. Let us see how this works out in dollar terms. The following table considers two loan amounts, one of S$50,000 and another of S$40,000. In both instances, the interest rate is maintained at 2.78% per year and a term of five years is considered.

By increasing your down payment by S$10,000, it is possible to reduce your monthly instalment by S$190 every month. While this sum is relatively small, it adds up to a hefty S$11,400 over the loan period. The trick is to find a balance between getting a big-enough car loan to help lessen the burden of your upfront payment while keeping your monthly instalment at an easily manageable level. Everyone has a different threshold for these, and you should think about what works well for your own circumstances.

2. Actual interest rates are higher than they appear

Car finance rates in Singapore are usually quoted in “flat" terms. These rates appear lower than they actually are because they don't take into account processing fees as well as the effect of declining loan principal. Normally, your should be paying less in interest as you are repaying your loan on a monthly basis. However, car loans charge a "flat interest" that remains constant throughout the duration of a loan. If you borrow S$50,000 for 5 years at 2.5%, you will be paying S$104 in interest alone every single month. In contrast, home loans interest charges decline every month as you pay down your debt.

Given this, a flat interest rate of 2.78% per year usually translates into an effective rate of about 5%, a much higher rate than you think you might be paying. Make sure to keep this in mind when you are dealing or negotiating with a lender.

3. Consider the total cost of ownership before taking a car loan

How much is a bank willing to lend as a car loan? While the cap is based on MAS rules, the actual amount will be decided by the bank after taking your monthly salary into account. In most cases, you will be allowed to borrow a sum that requires you to pay a monthly instalment that does not exceed between 20% and 40% of your income. Before you take the loan, you should consider whether you can really afford to pay the monthly instalment in addition to all the other expenses that owning a car requires you to bear.

Besides car loans, there are other costs of owning a car in Singapore. A government website offering financial advice describes these costs by different categories, which we feature below. It points out that for a car that costs S$90,000, you would have to spend S$26,872 per year. Of this expenditure, only S$12,036 pertains to monthly instalments to your lender. The remaining S$14,836 is accounted for by other expenses.

4. Car insurance

According to our study, the average cost of car insurance in Singapore is around S$2,000 per year. Since a car insurance is compulsory in Singapore, you would naturally like to save as much as you can on this expense.

Car dealers often offer a “bundled” car insurance plan. This implies that they quote a total price that includes the open market value of the car plus the insurance. However, you should almost always find out how much it would cost you to insure your car directly from an insurance company. There are several advantages to this: first, you may be able to buy insurance at a lower rate. Secondly, you could also select a policy that better suits your needs.

In many instances, the bundled insurance plan is inflexible and expensive because the car dealer inflates the cost due to their high commission as a middleman. You could be much better off if you shop and compare different car insurance policies online before you buy a car. Our team at ValueChampion has done an extensive research on the car insurance market in Singapore, and have made great recommendations in our guide at the link.

Consider your options carefully

Several banks and other lenders offer car loans and making a choice between them can be difficult. A good place to start your search is our guide on the best car loans currently available in Singapore. Once you have decided upon a lender, try and restrict the amount that you borrow to the minimum possible. This will ensure that your monthly instalment is low and that you incur the least possible interest cost over the term of the loan.