Can you afford a car loan in Singapore
Getting a car loan is surprisingly easy in Singapore – it can be done within the same day, and even within a matter of minutes (if your documents are in order). But it’s what comes after that’s difficult. The monthly repayments can be a burden, and you should ensure you’re more than able to service them:
How much does a car loan cost you each month?
In Singapore, the car loan rates are different for new cars and used cars.
For new vehicles, most bank loans have a rate of 2.7 per cent interest per annum. There are few variations on this. For used cars, the bank loan rate is somewhere between 2.98 per cent and three per cent per annum.
(You can also refinance a car loan, which we explain further below).
Besides the bank however, many car dealers offer financing options of their own. These tend to be more expensive, and can range between 3.7 per cent to over four per cent per annum.
Besides this, you should know that car loan interest rates use a flat rate. This makes the interest higher than it might appear. Let’s take a closer look at the numbers:
First, consider the Loan-to-Value (LTV) ratio and loan tenure.
The maximum LTV (the most you can borrow) for a car loan is 70 per cent of the car’s Open Market Value (OMV), if the OMV is $20,000 or below. Otherwise, the maximum is 60 per cent of the OMV.
The maximum loan tenure is always seven years.
As an example, let’s say you buy a new family sedan, with an OMV of $20,000. The total cost of the car is $110,000. The down payment is $33,000. You could then borrow the remaining $77,000, at 2.7 per cent interest, repayable over the next seven years.
*This is not applicable to commercial vehicles, such as private hire cars. Speak to your ride share service provider, for more details.
Next, understand how flat rates work, to determine monthly repayments.
A flat rate means the interest payable is calculated according to the principal (the original amount owed). This is different from the way interest is used in, say, a credit card loan, in which the interest is based on the outstanding amount owed, not the original amount borrowed.
Here’s how a flat rate is calculated:
The loan amount is $77,000.
At an interest rate of 2.7 per cent per annum, the interest for one year is $2,079 (that’s 2.7 per cent of $77,000).
Over seven years, the total interest repaid is $2,079 x 7 = $14,553.
Divided over 84 months (seven years), the interest repayment every month is $173.25.
At the same time, the repayment of the principal ($77,000 over 84 months) is around $916.60.
This comes to a monthly repayment of ($173.25 + $916.60) = $1,089 per month.
If you were to convert this to an Effective Interest Rate (EIR), for which we’ll spare you the long-winded maths lesson, the “real” rate is about 5.34 per cent per annum. As a rule of thumb, a flat rate is about twice what it seems, when converted to EIR.
Think about this before accepting high rates, such as 3.7 per cent, from a car dealer. At a flat rate of 3.7 per cent per annum, you would be paying an EIR of around 7.4 per cent per annum. That’s a massive amount of interest over a seven-year period.
Work out how it would affect your home loan, if you haven’t bought a flat yet.
When you apply for a home loan, we can help you find the lowest interest rates on GoBear.com (it’s free). What we can’t help you with is the Total Debt Servicing Ratio (TDSR).
When you take a home loan, the TDSR caps your monthly repayments at 60 per cent of your monthly income, inclusive of loans such as your car loan. For example, if you earn $5,000 a month, your TDSR limit would be $3,000. If your home loan would raise your total monthly repayments beyond $3,000, your application will be rejected.
Now if you had taken the above car loan, it would also be factored into your TDSR. This means your home loan limit would be ($3,000 – $1,089) = $1,911 per month. This usually means you’ll have to fork out a bigger down payment, take out a longer loan tenure, or just buy a smaller house.
For this reason, we always advise against getting a car loan before you buy your flat.
Otherwise, you need to do some financial planning, and make sure you can still afford your flat if you take up that car loan.
Finally, you should save up at least six months of the car loan repayments, before buying.
If the car loan repayments are $1,089 per month, we advise you to save at least $6,534, before purchasing the car.
In event of emergencies, such as unexpected retrenchment, these savings will cover the car loan while you find a new source of income (at the very worst, it will give you time to resell the car at the best possible price).
Never buy a car when you’re living paycheque to paycheque. Remember that, even if you sell the car, it may not pay off the remaining loan. Cars are depreciating assets, and may sell for a lot less than you borrowed.