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Should you scrap your car or renew your COE?

Should you scrap your car or renew your COE?

After 10 years of loyal service, your metal steed has finally reached the end of the road. Not literally though, but mandated by a government policy that’s “well-loved” by car owners – the 10-year Certificate of Entitlement (COE). It’s off to the scrap yard, while you find a new car.

Or is it? With tight curbs on car loans, many drivers are now finding it harder to afford a new vehicle. This raises the possibility of renewing the COE, instead of buying a car again.

Here’s what you to need to know, before you renew the COE.

How does renewing your COE work?

Once your 10-year COE is expired, you have three options:

You can deregister the vehicle and get the Preferential Additional Registration Fee (PARF) rebate; this is essentially scrapping the car. You can register for a 5-year extension of the COE, or you can register for a 5-year or 10-year extension of the COE.

For non-commercial vehicles, which refers to your normal hatchback, sedan cars and etc, a 10-year COE can be extended in perpetuity (i.e. you can extend it for another 10 years after the renewal), whereas a 5-year COE cannot.

For commercial vehicles (i.e. vans, lorries, etc), the absolute limit is 20 years.

Note that, once you renew your COE, your PARF rebate (the rebate for the “unused” portion of your existing COE) is forfeit.

The cost of renewing your COE is the Prevailing Quota Premium (PQP). This is the moving average of the past three months’ COE rates. You can check the current PQP from the Land Transport Authority (LTA) website.

You have to make payment to renew the COE two weeks before the expiry. If you want to renew it after that (the maximum time limit is one month after expiry), you’ll have to go down to the LTA customer service centre, and fill in an application.

How to decide if it’s worth renewing the COE

There are five factors to consider, before deciding to renew your COE:

  • How much longer will you be driving?
     
  • Will there be maintenance issues with the aging car?
     
  • Is your car under the WEC or OPC / Revised OPC scheme?
     
  • Check your debt ratio, on a COE renewal loan versus a car loan
     
  • What percentage of the car’s overall cost was taken up by the COE?

How much longer will you be driving?

Consider how much longer you intend to drive. If your intention is to retire in five years’ time, for example, there’s probably no need to get another car loan. Or if you are done ferrying the kids to school as they’re all grown up and able to move around on public transport.

You could just renew the COE for the next five years, to last out the remaining time.

Remember that renewing the COE is always cheaper than getting another car, as you only pay the PQP; you don’t have to pay for the cost of a car again.

But again, know this – renewing your COE also means you are giving up on your PARF rebate which rmight be worth a few thousand dollars.

If you decide to renew your COE after all, don't forget that car insurance is mandatory. It's pretty much the same deal, so always shop around and find the right car insurance for your needs.

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Will there be maintenance issues with the aging car?

Maintenance

If your car has already had its COE renewed (e.g. it’s already 20 years old), or it’s seen a lot of use, a new car may be a better idea. Don’t underrate the impact of a worn-out fuel injector, or even a leaking air-conditioner.

Assume you have one major mechanical issue a year (typical for cars that are 15 to 20 years old), which costs about $1,500 to $2,000 to fix. Over the course of the next 10 years, that comes to $15,000 to $20,000 in wasted money.

So before you decide to renew the COE, do a quick cost comparison. Work out the cost of the new car you want, and deduct the PQP.

Next, determine if the $15,000 to $20,000 of maintenance would more than make up for any savings. If the cost ends up being more or less the same, it may not be the worth the hassle of dealing with an old car.

Ultimately, you know your car best – if it’s been 10 years and it’s already giving problems, skip the renewal, collect the PARF rebate and just a get a new or relativel new second-hand car.

But if you feel your car is solid despite its age (Toyota is famously indestructible in some circles), you can save a lot of money by giving it another 5 to 10 years.

Is your car under the WEC or OPC / Revised OPC scheme?

If you have a Weekend Car (WEC), or an Off-Peak Car (OPC or Revised OPC scheme), it’s generally not worth getting your COE renewed.

This is because – despite your car’s status - you must pay the PQP as if you own a normal car. The lower rates for these schemes don’t apply for COE renewal. And needles to say, your car will still remain a WEC or OPC / Revised OPC car, even after you pay the PQP.

You should only renew the COE on these cars if you’re in desperate need for a vehicle, and this is the only way you can afford to hold on to one. Alternatively, you may want to renew the COE and switch it to a normal car for full-day usage.

Check your debt ratio on a COE renewal loan versus a car loan

Debt ratio

You can get a loan for COE renewal, just as you can get a car loan. However, the interest rate for COE renewal loans tends to be higher – it’s typically above 3% per annum, whereas new car loans have an interest rate of around 2.78 per cent per annum (or around three per cent for a new car).

As with car loans, the maximum loan tenure is usually around 7 years, and most of these loans can finance around 70% of the COE renewal cost.

Work out the monthly repayment for a car loan, with your desired model. Next, work out the monthly repayment for the COE renewal loan.

Ideally, your debt ratio – the percentage of your monthly income that goes into loan repayments – should not exceed 40 per cent. For the sake of financial prudence, you should pick the loan that would keep it under this percentage.

If they both fit, look through the other considerations on this list.

What percentage of the car cost was taken up by the COE?

In a strict number-crunching sort of way, COE renewals become more cost effective as the car’s market value rises. For example, if you have a high-end car like an Aston Martin or a Jaguar, it’s probable that the COE is only a small percentage of the total price, probably 15% to 20% of the total price.

But really, if you have THAT much money to buy an Aston Martin, you’ll probably splurge on a shiny new vehicle, wouldn’t you?

If you have a cheaper family sedan (we won’t name brands because that’s rude), the COE probably makes up some 60 per cent of the overall cost.

As such, it’s more cost effective to renew the COE on a fancy car, than on a cheap one.

As an aside, you could also argue that high-end cars are likely to have fewer maintenance problems; but that’s a debate for the car experts, not us (ask your mechanic for more details).