How to choose the right car loan

There's no need to feel overwhelmed when choosing a car loan. Just follow our simple guide to find one that's right for you.

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If you’ve started searching for a car loan, it is highly possible that you’ve come across terms like ‘refinancing’, ‘balloon scheme’, ‘in-house financing’ or ‘early repayment’. A car loan is a large financial undertaking where you could be servicing anywhere from one to seven years, so it’s important to understand the different options available and make the right choice. This guide takes you through how each type of loan works, and how to pick the best one for your needs.

How do car loans work?

Car loans are similar to personal loans in a sense that you borrow a set amount of money and pay it back over time, typically with ‘flat’ interest rates. The difference is that these loans are specifically designed to finance the purchase of a vehicle. Car loans may be used to finance both new and used cars, as long as the used car is in a condition that the lender deems acceptable. Another point to note is that all car loans in Singapore are secured loans, whereby the car itself is the loan collateral, giving the lender the right to repossession should you default on your loan. Don’t worry, the risk of losing your car to the lender is very unlikely as long as you make good on the loan repayments. A secured loan does have its distinct benefits – lower interest rates and fast approvals, as long as you meet the eligibility criteria and your credit score looks good.

To deter buyers from taking up loans hastily, the Monetary Authority of Singapore (at the time of writing, 13 April 2018) regulates that buyers can loan up to 70% of the purchase price for cars with an open market value (OMV) of $20,000 or less, and up to 60% for cars with OMVs of more than $20,000. The maximum loan tenure is capped at seven years. Simply put, this means that you would need to prepare at least a 30-40% down payment depending on the car’s OMV, which will be a significant sum considering car prices in Singapore are often upwards of $100,000.

Types of car loans

There are a few options to consider when looking at car loans, and it’s important to understand the difference between them, as well as their pros and cons, so you make the right choice.

  • Fixed rate financing. Car loans in Singapore typically charge ‘flat’ interest rates, as opposed to ‘rest’ interest rates on home loans. This means that the monthly interest payment is constant over the entire tenure of a loan. For example, a 2% flat rate for a $50,000 loan over 5 years will incur a yearly interest of $1000. These are the most common car loans offered by lenders in Singapore as they are straightforward and most competitive.
  • In-house financing. Some finance companies or dealership may offer in-house loans for buyers facing rejection or slow turnaround when trying to get a car loan from traditional banking channels. The dealership is able to offer such financing by securing a large sum of money from banks, and then offer portions of it to buyers with difficulties securing loans at significantly higher interest rates.
  • Balloon financing. A balloon scheme works by excluding the minimum PARF rebate portion of your car loan in the total loan amount, bringing down the monthly instalment and making the loan seemingly more affordable. For example, if your car loan is $50,000 and your car’s minimum PARF is $10,000, you’ll only pay instalments based on $40,000. However, such schemes charge significantly higher interest rates and impose hefty repayment penalties. Bear in mind that even though you do not need to pay for PARF at the beginning, it is still mandatory for you to pay the PARF it at the end of your loan tenure.

How to choose the right car loan

Finding the right loan doesn’t have to be complicated. Follow these steps to ensure you make the best choice for your needs:

Decide how much you can afford

Borrow within your means. Make sure you don’t apply for a loan so high that it will make it difficult for you to meet your repayments. While it may seem a like good idea to have a shorter loan tenure and making large repayments to finalise the loan sooner, you could find yourself struggling financially if these costs are too high. Sit down and work out how much exactly you can comfortably afford to put towards the loan every month.

Understand your budget

Next, you need to work out how you are going to budget for the repayments. Always make sure you have sufficient funds for at least four to six months of repayments so you can still make good on your loan payment even if you face sudden and unforeseen circumstances which may affect your cash flow, such as retrenchment.

Work out what you can access

You may not be able to access all of the loans you are interested in. If you have bad credit or has a lower income, you may not be approved for certain loans or loan amounts. If you fall into this category, you can try looking for lenders offering in-house financing or apply with a guarantor. Every loan application you make will be listed on your credit file, and multiple applications within a short space of time may look irresponsible to prospective lenders. Check that you meet a lender’s eligibility criteria before you apply to avoid making unnecessary applications.

How much do you need to borrow?

The amount you need to borrow may also affect the loans you are able to access. While MAS permits you to borrow up to 60 or 70 percent of the car price (depending on the car’s OMV), the lenders are not obliged to loan you the full amount. Some lenders have a set minimum or maximum amount that they will let you borrow. Make sure the loan you require falls within the lender’s allowable limits.

How flexible do you want your loan to be?

Some car loans are more flexible than others, so think about which conditions would suit you best. For instance, some lenders offer flexible repayment options, which means you can make additional payments and clear your loan early without penalties. Make sure you check if these benefits are available so you can make a more comprehensive comparison between different lenders.

How to apply

Getting a car loan is a huge financial commitment, so avoid rushing into it unless you have done your due diligence and research. Compare all the loan options available and once you have selected the offer that best suits your needs, visit the lender’s website and begin the loan application.

Eligibility requirements differ between lenders, so be sure to confirm whether you will be eligible before you apply. Generally, you need to be over the age of 21 and be receiving regular income payments into your bank account. You may also need to have a good credit rating.

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