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 – that’s about 30% of a three-room HDB flat.
Unsurprisingly, almost everyone who owns a car has had to take a loan to do so. While you might technically qualify for such a loan, consider the following before taking on such a huge debt burden.
Car Loans are Less Restrictive Now
In 2016, the Monetary Authority of Singapore (MAS) eased curbs on car loans. Prior to this, the maximum loan quantum (the total amount that can be borrowed) was 60% 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% of the OMV.
Under the new regulations, the loan limits are raised by 10% across the board. The maximum loan quantum is now up to 70% of the purchase price if the OMV of the car is worth $20,000 or less, and 60% otherwise.
|Open Market Value (OMV)||≤S$20,000||>S$20,000|
|Pre-2016 Loan Limit||60%||50%|
|Post-2016 Loan Limit||70%||60%|
In addition, the maximum loan tenure has been extended from 5 to 7 years.
We checked the loan amounts for a Honda Accord (approximately $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 annum, for 7 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 that you’re ready to get a car loan:
1. Check your credit score
2. Secure your home loan first
3. Compare rates and find the cheapest loan
4. Check whether a car loan will make your expense ratio exceed 20%
5. Ensure you can repay the loan even after loss of income
1. Check Your Credit Score
Banks are not required to give you the maximum loan quantum. Just because they are allowed to loan you 70% 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 period of time, or having debts written off.
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 up small loans and paying them back responsibly. The easiest way to do this is to use a credit card and 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, we advise that you avoid car loans until you have secured your home loan.
When you make a home loan application, be it from the bank or the 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% 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. Do note that you should not take up a personal loan just to pay for your car’s downpayment.
Remember that a house is essential, 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, which will barely last you 10.
3. Compare Rates and Find the Cheapest Loan
Most car loans have a 2% to 3% interest rate p.a., but be sure to compare all your options. Do not go for the first and 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% 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.
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 on a more expensive car loan.
4. Will a Car Loan Make Your Expense Ratio Exceed 20%?
Work out the expense ratio of your car. Overall, the monthly cost should not exceed 20% of your monthly income. If you earn $7,000 per month, you should not be spending more than $1,400 a month on 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 other miscellaneous costs.
If the total amount would exceed 20% 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 for groceries and dining, you also get up to 20.88% savings at Esso and Shell, and 8% cashback at other petrol stations. There’s also the POSB Everyday Card, which grants 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 job or if your income is diminished? Will you be able keep up with 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% 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 recoup enough from the sale to pay off your 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 from one paycheck to the next. If you don’t have any savings, it’s best to assume that you cannot afford the loan, even if you qualify for it on paper.
Read these next:
7 Mistakes that Ruin Your Credit Score in Singapore
7 Reasons Not To Buy A Car In Singapore
Are You Ready To Get a Car Loan in Singapore?
Why Your Car Loan Interest is Secretly Double What It Seems
Car Loan Hacks for New and Used Cars
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.