Car Loan Refinancing in Singapore: What You Need to Know to Avoid These Common Mistakes

Alevin Chan

Alevin Chan

Last updated 18 October, 2022

Refinancing your car loan can make car ownership more affordable, but it’s not without its pitfalls. Here’s how car loan refinancing works in Singapore and four common mistakes to watch out for.  

Car loan refinancing refers to taking out a new loan on the outstanding balance left on your existing car loan. For example, let’s say you still owe S$60,000 on a car loan of S$120,000. Instead of faithfully continuing with your current payment plan, you decide to refinance your loan. 

This entails taking a loan from another lender to pay off your existing car loan. The new lender pays off your old lender, clearing your account on your behalf. Then, you focus on paying off your S$60,000 to the new lender. 

Ok, that sounds like you’re just wasting time and effort to end up in the same place – you still have to pay off the remaining S$60,000! That is correct, but what if I told you that the “original” S$60,000 and the refinanced S$60,000 are not exactly the same? 

The difference is, of course, interest. If you manage to get a lower interest rate for the remainder of your car loan, you will be able to save some money on your car loan.

But we’re getting ahead of ourselves here. In order to learn how to decide if you should refinance your car loan, you must first understand how car loan refinancing works in Singapore.

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Rules for refinancing motor vehicle loans in Singapore

According to the Monetary Authority of Singapore (MAS), here are the rules when refinancing your car loan. Note that this applies to both new and used cars purchased on or after 26 Feb 2013.

  • Maximum loan: Full outstanding amount
  • Maximum tenure: 7 minus X years, where X is the number of years since the motor vehicle loan was first disbursed

Here’s an example for illustration.

Loan first disbursed

2014

Loan refinancing

2017

Time between loan first disbursed and loan refinancing 

3 years

Maximum tenure of refinanced loan

7 - 3 years = 4 years

Maximum loan amount

Up to amount outstanding on original car loan

Implications of the seven-year cap

Now, be aware that under the prevailing car refinancing rules, you cannot extend the length of time you may take to pay off your car loan. You still have to pay off your entire car loan in seven years at the longest. 

In other words, if you have two years left to go on a seven-year car loan, you cannot refinance your loan and stretch out the remainder over three years; the maximum tenure you can have is still two years.

In this case, the only way you can lower your monthly repayment amount is if you refinance at a much lower interest rate – especially since there is probably a penalty fee for repaying your original loan early.  

However, if you originally signed up for a five-year car loan, and two years in, decide to refinance, you may stretch out the remainder of your loan over up to five years (seven minus two years). This will result in lower monthly payments, which gives you more wiggle room to fit in a slightly higher interest rate. 

Common mistakes to avoid when refinancing your car loan 

By now, it’s apparent that the reason you’d want to refinance your car loan is to make it easier for you to meet your monthly car payments. But as shown above, the method isn’t completely foolproof. 

Take care to avoid these common mistakes when refinancing your car loan.

Not checking with your current lender

You don’t always have to go to another lender when refinancing your car (or any) loan; you can do it with your current lender if you both can reach an agreement on the terms. 

Your current lender may be willing to extend a favourable interest rate in order to keep you as a customer, so be sure to ask them first. 

Confusing car loan refinancing with cash-out car refinancing

Cash-out refinancing is a method to generate extra cash by borrowing against the market value of your car. It is not to be confused with car loan refinancing, which is based on the remainder of your loan only. 

This is how it works. Let’s say your three-year-old Tesla 3 has a resale value of S$70,000. The outstanding amount on your car loan is S$50,000. With cash-out refinancing, you can potentially take a loan of up to S$70,000, leave S$50,000 to pay off your loan, and pocket the difference of S$20,000 in cash. 

While this may seem like a good solution to a financial pinch, know that you are taking a loan, which involves paying interest charges and fees. Before doing this, be sure to explore other alternatives such as personal loans and compare the cost of borrowing.

Cash-out car refinancing can also potentially allow you to borrow a larger sum than simply refinancing your car loan – this is detrimental if your goal is to reduce your debt burden and pay off your car loan quickly. 

Making your loan tenure longer than necessary

Earlier, we highlighted that you can refinance your car loan to lower your monthly repayments by spreading the outstanding amount over a larger number of years. 

However, overdoing it could have negative consequences; the longer you take to repay your loan, the more total interest you’ll end up paying. Thus, try to balance lowering your monthly payments and paying off your car loan as quickly as you can. 

Refinancing more than your car is worth 

Before refinancing your loan, be sure to check what your car is currently worth.

If your vehicle has negative equity – in other words, the value of the car is less than what you owe on your loan – you should reconsider refinancing the loan. 

Is the continued affordability of the vehicle reason enough to justify potentially paying more on your car loan? 

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An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.