MAS just eased restrictions on car loans. But before you run out and get a loan, check your credit score and make these preparations.
For most Singaporeans, a car is a sign of success, especially since Singapore is one of the most expensive places in the world to own a car. Even a modest family sedan can cost upward of S$110,000 today, which would pay for about 30 per cent of a three-room flat.
Unsurprisingly, almost everyone who owns a car has had to take a loan to do so. While you may technically qualify for such a loan, consider the following before accepting such a huge debt burden.
Car Loans are Less Restrictive in 2016
The Monetary Authority of Singapore (MAS) has eased curbs on car loans. Prior to this, the maximum loan quantum (the total amount that can be borrowed) was 60 per cent of the purchase price, if the Open Market Value (OMV) of the car was S$20,000 or less. Otherwise, the maximum loan was 50 per cent of the OMV.
Under the new regulations, the loan limits are raised by 10 per cent across the board. The maximum loan quantum is now up to 70 per cent of the purchase price, if the OMV of the car is worth $20,000 or less, and 60 per cent otherwise.
In addition, the maximum loan tenure has been extended from five to seven years.
We checked the loan amounts for a Honda Accord (approximate price of $137,000, including Certificate of Entitlement and Additional Registration Fee) from a randomly selected local bank. The loan quantum offered to us was $68,500, at an interest rate of 2.28 per cent per annum, for seven years.
Monthly repayments would be $946. The total amount repaid over seven years would be $79,464, and the total interest repaid would be $10,964.
We note that the down-payment of $68,500 is enough to cover the down-payment on a three room flat. In addition, the monthly repayment of $946 is a significant commitment. Both are factors that should make anyone think twice before taking the plunge.
But if you absolutely must have a car, here are some steps to ensure you’re ready to get a car loan:
1. Check Your Credit Score
Banks are not required to give you the maximum loan quantum. Just because they are allowed to loan you 60 per cent of the purchase price, it does not mean that they must.
If you have a poor credit score, there is a possibility that the bank will lower your loan quantum. If your credit report reflects serious issues, such as a credit grade of C or a statement of default, it is possible that your loan application will be rejected altogether.
As such, it is important to build your creditworthiness before thinking of major loans like a home loan or car loan.
Factors which lower your credit score are late repayments on unsecured loans like credit cards, multiple loan applications in a short time, or having debts written off. Note that, if you simultaneously take a car loan and a large personal loan to make up the down payment, this could negatively affect your credit score.
If you are unaware of your credit score, you can obtain one from the Credit Bureau of Singapore (CBS). This usually costs S$6.42.
If you have poor credit or no credit history at all, you can build one up by taking small loans and paying them back responsibly. The easiest way to do this is to use a credit card, on which you always repay the full amount (there is no interest charged on credit cards if you make full repayment).
2. Secure Your Home Loan First
At SingSaver.com.sg, we advise that you avoid car loans until after you have secured your home loan.
When you make a home loan application, be it from the bank or the Housing Development Board (HDB), your credit background will be checked. Having a car loan will negatively impact your Total Debt Servicing Ratio (TDSR).
Under the TDSR, loan repayments are capped at 60 per cent of your monthly income. This factors in all your loan obligations, including credit cards, personal loans, education loans, etc. A car loan at $946 a month, as explained above, would make up a significant portion of your TDSR, and restrict how much you can borrow for your house.
The TDSR is further impacted if you also took a large personal loan, in order to make the down-payment on the car.
Remember that a house is essential to living, whereas a car is not. Singapore is small and well-connected. Don’t end up getting a smaller home loan, and living in an uncomfortable situation for 15 to 20 years, just for the sake of a car.
3. Compare Rates and Find the Cheapest Loan
Most car loans are priced at around two to three per cent interest per annum, but be sure to compare all your options. Do not go for the first, most convenient offer. We know it’s boring to visit banks and talk about interest rates. But over seven years, even a difference of 0.5 per cent can result in significant cost differences.
You should also compare the different sources of financing, be it from the bank, or something organised by the car dealership. Those of you intending to join Uber will already know they have a car loan system of their own – compare their deal (and the resulting obligations) to the bank loan before agreeing to sign.
If you do not know how to make comparisons, speak to other car owners or visit forums like Sgcarmart for help. Be prepared to do the legwork, or be prepared to get ripped off! There is no advantage to taking a more expensive car loan.
4. Will a Car Loan Make Your Expense Ratio Exceed 20 Per Cent?
Work out the expense ratio of your car. Overall, the monthly cost should not exceed 20 per cent of your monthly income. So if you earn S$7,000 per month, you should not be spending more than $1,400 a month on your car related costs, inclusive of the loan.
Remember that besides the loan, your car incurs other expenses such as road tax, maintenance, car insurance, parking fees, Electronic Road Pricing (ERP) charges, petrol, and others.
If the total amount would exceed 20 per cent of your monthly income, you may want to consider getting a car at a later date, when your income has grown.
You can save on many car-related costs with the right credit card, such as the Citi Cash Back Card. On top of cashback on groceries and dining, you also get up to 20.88% savings at Esso, up to 20.8% at Shell, and 8% cashback at other petrol stations. There’s also the POSB Everyday Card, which gives up to 20.1% cashback at SPC.
5. Ensure You Can Repay the Loan If You Earn Less Or Lose Your Job
What will happen if you lose your income, or if your income is diminished? Will you be able keep making repayments?
Remember that it is not easy to sell a second-hand car at a good price. The value of a new car can depreciate by as much as 50 to 60 per cent in the first year (depending on make, model, and market demand). If something goes wrong in the second or third year and you need to sell the car, you may not even earn enough from the sale to repay the remaining loan.
It is important to at least have a “buffer” period. Always ensure you have enough saved to repay the loan for another three to six months, even if your income is lost. This will give you time to find alternative income sources, or to offload the car at the best possible price.
Never take a car loan when you are living paycheque to paycheque. If you don’t have any savings, it’s best to assume you cannot afford the loan, even if you qualify for it on paper.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.