Guide to taking out a car loan

Looking for an easy way to get behind the wheel of a new car? Try financing a vehicle through a car loan.

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You’ve found your dream car. The colour is perfect, the size is just right, and it drives like a dream; but the price tag is a problem. And you’re not alone.

Considering Singapore has the world’s highest car prices, it is no surprise that majority of buyers require car financing. Car financing provides a way for you to own a car without emptying out your bank account. You can buy a car and pay it off while you drive, instead of waiting until you’ve saved enough cash.

In order to navigate the world of car financing, there are some factors you need to consider.

How does car financing work?

As with personal loans, car finance is provided by a lender such as a bank, finance company or dealership. When you find a loan that suits your personal needs and matches your financial situation, you can use it to purchase your vehicle of choice.

Once you secure the finance, you’ll be subject to interest rates and will have to repay the loan based on the terms set out in your agreement. These terms are set by the lender and may include additional fees and stipulations, as well as built-in penalties for failing to make payments or early repayments. Make sure you take the time to compare finance options from different lenders so you get the best deal on offer.

Types of car finance loans

Essentially, all car loans are secured loans in Singapore. This means that the car itself serves as the loan collateral, which entitles the lender to repossess in the event that you default on your loan. However, the risk of getting your car repossessed is very low as long as you make timely repayments.

As a secured loan, you will be offered a lower interest rate, making car financing slightly more manageable considering the exorbitant car prices in Singapore. It is also easier to acquire and receive fast loan approval as long as you meet the eligibility criteria and have a good credit score.

Based on the Monetary Authority of Singapore regulations (at the time of writing, 13 April 2018), buyers can borrow up to 70% of the purchase price for cars with an open market value (OMV) of $20,000 or less, and up to 60% of the purchase price for cars with OMVs of more than $20,000. The maximum loan term is capped at seven years. With these regulations in place, it means that you would need to provide at least a 30-40% down payment, depending on the car’s OMV.

There are three distinct types of car finance in Singapore that offer different options and terms. Look at all the alternatives available and decide which one is right for your personal situation.

  • Fixed rate financing. Car loans in Singapore typically charge “flat” interest rates, meaning that the monthly interest payment is the same over the entire loan term. For example, a 2% flat rate for a $50,000 loan over five years will incur $1000 in interest every year. These loans are most commonly offered and sought-after by borrowers looking to purchase a new car in Singapore.
  • In-house financing. For buyers with a higher chance of facing rejection or slow turnaround when requesting a car loan from traditional banking channels, some finance companies or dealerships may offer in-house loans that they have already secured from the banks. To put it simply, the dealers borrow a large sum of money from banks and then offer portions of it to buyers having difficulties securing loans. Such financing normally comes with significantly higher interest rates.
  • Balloon financing. A balloon payment scheme works by excluding the minimum PARF rebate portion of your car loan in the instalments, lowering the monthly payments compared to that in a conventional car loan. For example, if your car loan is $50,000 and your car’s minimum PARF is $10,000, you only need to pay instalments based on $40,000. However, such financing incurs higher interest rates and early-repayment penalties. Learn more about balloon financing here.

How to compare your car financing options

All loans are not created equal, and some may have stipulations that can hurt you in the long run. With any type of finance, you should shop around for the best deal, and compare options to find one that fits your individual circumstances.

Here are a few things to consider:

  • Rates. Interest rates can vary depending on the lender. Always be clear about the rate you’re being offered and take the time to compare car loans from other lenders to be sure the offer is competitive.
  • Repayment options. Check with your lender on the frequency of the repayments, repayment modes and if you’re able to make extra repayments or repay your loan early without any penalties. If a penalty will be imposed, be sure of how much it will be if you ever need to sell your car or upgrade before your loan is fully paid. Early redemption amount for car loans in Singapore is computed based on the Rule of 78.
  • Loan terms and amount. Some loans have a minimum amount, which may be higher than the actual amount you need. Be sure to choose the loan amount that best fits your needs.
  • Other fees and charges. For every car, there will be a registration fee of $220 and a transfer fee of $25 (before GST). Check with your lender if there are any other fees that you’d need to be aware of before finalising the loan.

What you should watch out for

There are pros and cons when it comes to car financing. However, if you take the time to compare different loans and do your research on restrictions and fees before making a choice, the process will run more smoothly.

You should make sure you can comfortably manage the loan financially. You don’t want to end up defaulting on the loan because you can’t repay it. Failure to repay can give the lender the right to repossess the vehicle and sell it to repay their loss.

How to apply for car finance

Each lender has its own policies and qualifying rules, but there are some general principles that most lenders follow.

  • When you apply, you need to have a copy of your ID and work permit (for foreigners).
  • You also need to present financial information that includes your income, income tax assessment and credit history, including details of any debts, liabilities or obligations.
  • You need information regarding the car you intend to buy, including the make, model and value, and the hire purchase agreement.

Working out car financing may seem a little overwhelming at first, but if you take one step at a time and do the research, you’ll have a clear understanding of the best option for your needs. Once your finance is set up, you can finally get behind the wheel of your new vehicle and still have money left in the bank.

Picture: Shutterstock

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