Unless you are truly financially gifted, most of us tend to lack the cash and cash equivalents to pay for our cars in full.
Most of us resort to car loans to finance our bikes – now is not a bad time to get one too, as interest rates have been slashed as banks attempt to lure potential car buyers into borrowing.
When buying a car for the first time, the legality and terminology involved can be a bit complex.
But don’t worry, we’re here to break that technical jargon down into an easy-to-understand guide.
Understand creditworthiness
When buying a car, you can look for financing options from one of two sources.
You can either apply for a bank loan (independently or through your dealer) or opt for an in-house loan if your dealer gives you this option.
Bank loans usually have lower interest rates than dealer loans. They are also more strictly regulated than the latter and will affect your total debt ratio (TDSR).
Bank loan
Buyers of cars with an Open Market Value (OMV) of $ 20,000 or less are allowed to loan out up to 70 percent of the final purchase price.
Buyers of cars with an OMV of USD 20,000 and more are only allowed to loan out up to 60 percent of the purchase price.
The maximum repayment term for a car loan is seven years, although the term can be influenced by the remaining life of a car (if you are buying a used car) and your risk profile.
Dealer loans
Merchant loans are less scrutinized as they are less strictly regulated.
It’s not uncommon for parallel importers to offer up to 100 percent credit, with some of their offerings requiring a $ 0 down payment.
The terms are also negotiable, meaning you can request the term, interest rates, and loan amount that best suit your needs.
You can also use the balloon payment scheme.
Quickly summarized to calculate your total monthly repayment, the dealer will take the final sale price of your car and subtract your vehicle’s PARF value.
The value is then divided by the number of months, and after accounting for the loan interest, that final number is your monthly repayment.
This program gives you the luxury of lower monthly car payments, although you will have to reimburse the dealer for the PARF value in your final installment if you decide to renew your car’s COE.
However, dealer loans usually have significantly higher interest rates of up to 4.8 percent per year.
How do I apply for one?
We actually wrote an in-depth guide on the entire process here.
Basically, you have to be able to provide proof of income, usually over a period of 12 to 18 months.
You can get these from IRAS, your CPF contributions, or even computerized payroll from your employers.
Proof of identity and residence will then also be required to process the paperwork. The required documents vary depending on the choice of financial institution, so check before applying!
What to look out for
One foolproof way of comparing loans is to look at their respective interest rates. The higher the interest, the more you will pay over a period of time.
Juggle your down payment and repayment term because too long repayment terms mean your car would have cost you more.
Pay the maximum amount you can comfortably prepay to minimize the long term financial penalty!
Don’t be afraid to look around and look for alternative financial arrangements.
Also note that the rates shown online are only a guide – the actual interest rate you will get will depend on your creditworthiness!
Loan service for motorists
We have teamed up with renowned financial institutions to make car ownership easy.
Our competitive rates and paperwork support services will help you process the loan for your current car (if you have one!) As well as apply for insurance to ensure a smooth vehicle handover!
If you’re looking for an alternative to your typical bank or dealer loan – look no further!
ALSO READ: An additional $ 23.5 million in assistance for taxis, private drivers announced as Singapore tightened restrictions
This article was first published in Motorist.
