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Everything you need to know about your balloon payments
Make sure you know the ins and outs of balloon payments before settling on your vehicle finance.
When researching car loans, you may come across options that offer a balloon payment scheme. These loans can offer you lower ongoing repayments than conventional car loans as they exclude the minimum Preferential Additional Registration Fee (PARF) rebate portion of your car. However, it’s important to understand how balloon payments work, as well as how they’re different to conventional car loan payments before committing.
How do balloon payments work?
A balloon payment is basically a loan scheme whereby the car’s minimum PARF rebate portion is excluded from the car loan, resulting in lower ongoing repayments. For example, if your car loan is $50,000 and your car has a minimum PARF value of $10,000, you only need to pay interest and instalments based on $40,000. However, in a conventional car loan, you’d need to pay interest and instalments for the full loan amount of $50,000.
What is Additional Registration Fee (ARF)?
The reasons why Singapore has the world’s highest car prices are the exorbitant government taxes imposed on car owners. For example, all new cars registered in Singapore are subjected to a Registration Fee (RF), which is $220 (at the time of writing, 12 April 2018) and Additional Registration Fee (ARF). Moreover, Certificates of Entitlement (COEs) generally go upwards of $50,000, depending on the car category’s final bid.
Before we discuss the PARF rebate, you need to understand how the car’s ARF is calculated. Since March 2013, all newly-registered cars are subjected to a tiered ARF system:
| Vehicle OMV | ARF Rate |
|---|---|
| First $20,000 | 100% |
| Next $30,000 (i.e. $20,001 to $50,000) | 140% |
| Above $50,000 | 180% |
For example, if you’re purchasing a car with an Open Market Value (OMV) of $75,000, this is how the ARF is calculated:
| Vehicle OMV ($75,000) | ARF Rate | ARF Payable |
|---|---|---|
| First $20,000 | 100% | 100% x $20,000 = $20,000 |
| Next $30,000 | 140% | 140% x $30,000 = $42,000 |
| Above $50,000 | 180% | 180% x $25,000 = $45,000 |
Total ARF payable is ($20,000 + $42,000 + $45,000) = $107,000.
What is Preferential Additional Registration Fee (PARF) rebate?
The PARF rebate is computed based on the car’s age at deregistration. The age of a vehicle is based on the date of its registration, regardless if it was registered locally or overseas. In the case of the car with OMV of $75,000, the minimum PARF rebate is 50% of ARF paid.
Check the applicable PARF rebate according to the age of the car at deregistration:
| Age at Deregistration | PARF Rebate |
|---|---|
| Not exceeding 5 years | 75% of ARF paid |
| Above 5 but not exceeding 6 years | 70% of ARF paid |
| Above 6 but not exceeding 7 years | 65% of ARF paid |
| Above 7 but not exceeding 8 years | 60% of ARF paid |
| Above 8 but not exceeding 9 years | 55% of ARF paid |
| Above 9 but not exceeding 10 years | 50% of ARF paid |
| Above 10 years | Nil |
If you opt for a balloon financing scheme, the PARF rebate is excluded from your total loan amount, resulting in lower monthly instalments. However, there are a few disadvantages to this seemingly ideal scheme, namely significantly higher interest rates and much higher early repayment penalties. So before you decide to commit to balloon payments, understand the risks involved.
What are the benefits of a balloon payment?
Balloon payments offer a number of advantages, including:
- Reduce your repayments.
This is a balloon payments scheme main advantage. By excluding the minimum PARF amount, the loan amount is lower and so would be your ongoing repayments. - Greater financial mobility.
With lower monthly repayments, you may be able to finance a higher-end car model compared to a conventional car loan.
Key considerations of financing options with balloon payments
Before opting for lower repayments with a balloon scheme payment, ask yourself the following:
- How much additional interest will you be paying? While your repayments are lower, working out how much the lowered repayments are costing you in additional interest over the loan term is an important step. Are the long-term costs worth the short-term savings?
- Will you be able to drive the car until it is ready to be scrapped? To reap the benefits of this scheme, you must have driven the car until it’s ready to be scrapped. Have you considered if you’ll have sufficient funds to keep paying off the loan in the event of an economic downturn and need to sell off the car earlier? In that case, you may not only face higher early settlement penalties but also need to continue paying the loan’s extremely high interest rates.
Car loans that offer balloon payments can be a good option to consider as they help keep your ongoing repayments low. However, as they incur much higher interest rates and early repayment penalties should you want to rid the car before the tenure is up. Also, bear in mind that some balloon payments may also leave you with a hefty sum to deal with at the end of your term, so it’s important you understand everything about this financing option before you apply.
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