Factors You Should Consider Before Taking on a Car Loan

By: MML Marketing

Getting a new ride is probably the best feeling ever, only for this feeling to go along with the lingering reminder of having to pay by instalments – It is undeniable that buying a car in Singapore could be both stressful and exciting.

Before you make the decision to take up a loan for your own set of wheels, it is advisable to take your time to consider these pointers first.

1. Getting the Right Vehicle for Your needs

Do you really need this machine, or are you after its fancy add-on components that usually costs more than its worth? We are taught since young to only buy what we need, not what we want (forgetting the occasional splurge) and this applies for car shopping as well, especially since it does not add up to a small sum in a country like Singapore. Let’s put it this way, it is more practical to have a family-friendly car if you have two kids, compared to the two-seater automobile you have been scrutinizing.

2. Budget Limitations

With effect from 27 May 2016, Monetary Authority of Singapore (MAS) introduced new loan constraints. Applying to both new and pre-owned cars, the new rule states that car loans must be capped at 60% of the purchase price for cars with Open Market Value (OMV) higher than $20k, and 70% for cars with OMV less than or equal to $20k. Banks will have to consider the car’s depreciation to determine the ‘applicable OMV’ value of used cars and also, the tenure of the loan is capped at 7 years.

Open Market Value

of Motor Vehicle

Maximum Loan-to-ValueMaximum loan tenure
Less than or equal to $20,00070%7 years
More than $20,00060%

Source: http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-Eases-Rules-on-Motor-Vehicle-Financing.aspx

This essentially means, buyers must be able to cough up a cash total almost half the car’s purchase price upfront and additionally, a shorter tenure means people will have to pay for heavier monthly repayments each time. Buyers also have to be aware that when banks perform credit assessments of applicants, the higher salary value between the guarantor and the applicant is taken instead of a combination.

3. Early Loan Completion

If car owners wish to sell off their cars before it has been fully repaid, it is more likely than not to have outstanding interest amounts due to the banks. Loans settled earlier than expected means interest incomes would be reduced and therefore, banks usually enforce charges to partially compensate for such losses. Most banks will first calculate the interest rebate using ‘The Rule of 78’ formula and based on this assumption, it resulted in a 20% penalty on the rebate for early repayment.

Most people settle their loan early because they want to buy a brand new car, but is it the more practical option? To put things in numbers, let’s look at an example of 7-year loan of $100,000 at 2% interest that you wish to fully pay up after 30 months.

CalculationsAmount
Total interest to be paid2% x 7 years x $100,000$14,000
Period of finance84 months

(7 years)

Monthly instalment($100,000 + $14,000) / 84$1,357.14
Number of instalments paid30 months
Total amount already paid for$1,357.14 x 30$40,714.29
Interest rebate according to ‘The Rule of 78’[54(54+1)] / [84(84+1)] x $14,000$5,823.53
20% of interest rebate as penalty0.2 x $5,823.53$1,164.71
Early loan settlement amount$100,000 + $14,000 – $40,714.29 – $5,823.53 + $1,164.71$68,626.89

Besides the above factors on taking a loan, you will also need to consider the other vehicle ownership costs such as car insurance, road tax and servicing/repairs for your vehicle. To decide what is comfortable for you on a monthly basis, it will be best to list down all the various ownership costs and decide what will be a comfortable amount for a monthly loan instalment for you. We hope this article has helped you to understand the various factors to consider before committing to a loan.

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