Car loans in Singapore - which type of car loan is the best for you?

Ridiculous is the only apt word for describing new car prices in Singapore. The cheapest new car is around $100,000 - this money that gets you an economical compact sedan such as the Mitsubishi Attrage, will allow one to purchase the same car, with enough leftovers for a GR Supra in the U.S.A. 

Naturally, not everyone who wants to own a car is able to drop that kind of money upfront. And that is where a car loan comes in handy in Singapore. With the various financing options around, there's almost always one that will allow you to get your hands on a car. But of course, there are possible pitfalls that one should avoid - you shouldn't get yourself into a situation where you can barely make ends meet after paying for your car's instalments. With this, let's find out more about car loans, and the various arrangements available out there.
 
 
Are you looking at a brand new car, or a used car?

The car loan options that are available to you are affected by the car you want to buy. Financing options are typically more limited when purchasing a new car - Authorised Dealers tend to only offer bank loans.

When purchasing either a used car, or a new car from a Parallel Importer, there are often options to opt for like an in-house car loan or a bank loan. These will be handled by the salesperson in charge, minimising hassle. If you like to shop around, you can also approach the various banks directly to apply for a car loan.

In Singapore, the maximum amount that one can loan for the purchase of a car is determined by the OMV of it. For cars that have an OMV up to $20,000, you are allowed to borrow up to 70% of the purchase price. Meanwhile, for cars with an OMV that exceeds $20,000, the maximum amount is limited to 60% of the purchase. That means that you'll have to fork out a downpayment of at least $$30,000 when buying a new car.

Now, the actual amount of loan that can be approved will still depend on various factors such as your monthly income, your financial commitments, credit score and your Total Debt Servicing Ratio (you can't use more than 60% of your income to pay loans). Meanwhile, the maximum loan tenure is 7 years. Of course, if it is a used car that has less than 7 years of COE left, you won't be able to take more than the car's remaining lifespan to repay your loan. Now, with all these in mind, let's look at the various loan options.
 
 
Bank Loan

Bank loans are arguably the best choice. They usually have a lower interest rate, typically ranging from 2.28% to 2.78% per annum. These loans are usually rather straightforward, unlike in-house options where there are different schemes offered for you to choose from, along with complicated charges and terms and conditions.

Typically, your car dealer will be able to handle the process of applying for a bank loan, helping to keep hassle at a minimum. However, your options might be limited to the banks that the car dealer has a working relation with. Alternatively, you could get out there and search for the best bank loan with the lowest interest rate, but it can be more troublesome as you would have to settle the application process by yourself.

Do note that any car loan is subject to approval, as different banks could have different requirements - this can prove to be a problem, especially with older used cars (some banks might not offer loans to COE cars, and the ones that do might not have an attractive car loan interest rate).

 
In-house loan

In-house car loans are offered by the car dealers and their related financial arms. These are typically offered by Parallel Importers and used car dealers.

The attraction of this type of car loan is its flexibility - financial institutions that offer in-house loans often make concessions on the type of cars that they extend a loan towards, at the expense of a higher interest rate.

For example, it might be difficult to find a bank that will loan you a large amount on a used COE car that only has a couple of years of COE left. In this case, there might be in-house financing options that will allow you to borrow the amount you need, but at a much higher interest rate than the prevailing 2.28% to 2.78% that banks offer.

Yet another benefit (or drawback depending on how you look at it) is that in-house loans do not put your Total Debt Servicing Ratio into consideration, which can allow more flexibility. This can be especially useful for borrowers who do not have a consistent paycheck - such as businessmen.

With in-house loans, the salesperson tends to gain more from the arrangement due to the administrative and miscellaneous charges. The good news is, with this additional motivation, you can expect a complete and convenient service, and a swift approval time.

The flexibility makes in-house loan an attractive option, and it might even be your only option in some circumstances. However, it is important that you do not overestimate your ability to service the loan, and end up with crippling debts.
 
 
Balloon-scheme loans

Technically, a balloon-scheme car loan is also an in-house car loan, but it is a rather unique and often-mentioned scheme that is quite different from the typical arrangement.

The quickest explanation of a balloon-scheme loan is that the PARF rebate amount at the end of a car's COE period is removed from the loan amount and will only be paid back at the final instalment date.

On the surface it seems like a no-brainer - you'll get to loan a smaller amount, with the interest applied to that smaller amount, and you’ll only have to pay back the PARF rebate amount, which is what you will be getting back when you scrap the car at the end of 10 years anyway.

But you have to consider that balloon-scheme car loans usually have substantially higher interest rates. So the effective results are a lower monthly instalment, but a higher total amount at the end of the day. Of course, there are perks to opt for a balloon-scheme car loan - it often means a lower monthly repayment amount, and allows you to stretch your budget to get a car that you might not be able to afford otherwise.
 
 
So, what should you go for?

All loan options come with their fair share of pros and cons. If eligible, bank loans would seem like the best option as it results in the lowest amount of spending in the long run. However, the limitations it presents might prevent some from opting for it.

Meanwhile, the other options such as in-house car loans and balloon-scheme car loans can be helpful tools to allow you to own a car of your liking. But these powerful tools, if abused, can easily result in financial ruin.
What's important is to have a good gauge of your ability to repay the loan. Ensure that you know what you are getting into, do not be misled by the salesperson or fool yourself into taking out a massive, costly loan for a fancy car just to end up in a world of pain further down the road.

When trying to determine the amount of monthly instalment that you are comfortable with, always remember to factor in some buffer in case of emergencies and unexpected spending.

There's a reason why the government insists on the Total Debt Servicing Ratio.


 
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