When Can You Refinance a Car Loan in Singapore?

You’ve just secured your dream car and are now looking at the fine print. With that, you may be wondering how soon you can refinance it to get a better deal.

Car loan refinancing in Singapore involves securing a new loan to replace your current one, aiming for more favourable terms. This typically means a reduced interest rate or adjusted repayment period, leading to lower monthly instalments and overall interest savings. Imagine you have an outstanding car loan of S$60,000. A new financial institution steps in, settles your existing debt, and you then owe them S$60,000. The key advantage is that the new loan often comes with a lower interest rate, resulting in significant savings over the loan's duration. This concept is particularly relevant in Singapore, where car ownership is a significant financial commitment due to high vehicle prices and associated costs.

Refinancing your car loan can significantly ease the financial burden of car ownership. A major benefit is the chance to secure lower interest rates, especially if market rates have dropped or your credit score has improved. You can also adjust the loan term: extending it to lower your car payments but increasing overall interest or shortening it to pay off the loan faster and save on interest.

When is the best time to refinance a car?

If you do decide to refinance your car loan, it’s important to know that it hinges on several factors, including how long you have been paying the loan and your current financial standing. While immediate refinancing might catch your eye, understanding the specifics and waiting for the perfect timing can help you make the best decision.

Within the initial 60-90 days of your auto loan

• Attempting to refinance within the first 60 to 90 days of obtaining your car loan can present administrative hurdles, which can delay your plans or impact your current financial situation. This is largely due to the administrative processes involved in establishing a new car loan, which includes the transfer of loan agreements and car ownership.

• These procedures can take time to finalise. That's why it's generally advisable to allow sufficient time for these processes to be completed before considering refinancing. This ensures that all necessary paperwork and transfers are finished, making the refinancing process smoother and more efficient.

» MORE: Check your credit score for free

Six months or more into the car loan

• In Singapore, as in many other countries, a history of responsible debt management is a key factor in improving your creditworthiness. In Singapore, 1,813 out of 2,000 is viewed as an excellent score, while 1,724 to 1,812 is good, and below 1,723 could potentially limit your access to good financial products and services. To have a copy of your credit score, you can get it from the Credit Bureau Singapore (CBS) office or online via your Singpass account.

• A better credit score can open doors to better refinancing terms, potentially qualifying you for lower interest rates than those you initially secured. Some of the ways to help you improve your credit score are by making timely car loan payments and keeping your credit card balances low. After at least six months of consistent, on-time payments on your car loan, you’ve likely established a solid payment history and are on the way to having a better credit score.

• This period also allows you to closely monitor the prevailing interest rates of auto loans. When market rates decline, you have the opportunity to secure a new loan with a lower interest rate, directly translating to reduced monthly payments and substantial savings over the remaining loan term.

With two or more years left on the car loan

• If you find yourself with two years or more still remaining on your car loan, you're in a prime position to potentially achieve substantial interest savings through refinancing. With a significant portion of your loan term still ahead, even a slight reduction in your interest rate can translate to considerable savings over the life of the loan. This is especially true if you're able to secure a new loan that offers a significantly lower interest rate than your current one.

• However, it's crucial to be aware of the Monetary Authority of Singapore (MAS)'s regulations regarding loan tenures. This awareness will help you avoid any unexpected complications or limitations during the refinancing process. 

• According to MAS, you can refinance up to the total amount you still owe, with a maximum loan term determined by subtracting the original loan tenure from seven years, or the remaining Certificate of Entitlement (COE) validity, whichever is shorter, provided you pass the lender's credit evaluation. This calculation applies to both new and pre-owned vehicles. Notably, individuals with physical disabilities and their caregivers may be exempt from standard financing rules when purchasing a single vehicle, subject to meeting the financial institution's credit assessment.

Should you consider refinancing in the first place?

Before quickly filing the application to refinance your car loan, it's essential to determine if it aligns with your current financial situation. You should decide based on more than just interest rates; it should be based on whether financial circumstances, car value, and loan terms align.

• Changes in your income, for instance, can significantly influence this decision. If your income has increased, you might consider refinancing to a shorter loan tenure with higher monthly payments, which allows you to pay off the loan faster and save on interest. Meanwhile, a decrease in income could prompt you to extend the loan term, lowering your monthly payments and easing financial strain.

• Another critical factor to consider is the car's current market value. In Singapore, the amount you can borrow for a car loan is capped at either 60% or 70% of the vehicle's Loan-to-Value (LTV) ratio, which is directly tied to the car's Open Market Value (OMV). For motor vehicles with an OMV of S$20,000 or less, the maximum LTV is 70%, while for those with an OMV exceeding S$20,000, it's 60%. Even though this might seem like a significant initial outlay, it's actually a smart financial move. Borrowing a smaller amount reduces the total interest you'll pay over the life of the loan. Therefore, opting for a 40% down payment can significantly lower your monthly car instalment payments.

• It's vital to check your existing loan agreement for any early repayment penalties. These penalties could negate the potential savings from refinancing, making it a less attractive option. Banks may charge early repayment fees to offset expenses incurred when a loan is settled before its original term. These fees vary, so be sure to inquire with your bank regarding any extra charges you might be responsible for.

• Don't overlook the processing fees associated with the new loan. This could be 0.5% to 2.5%, or more, of the loan amount based on the bank. So, carefully calculate how much the overall savings from refinancing, primarily from lower interest rates or adjusted loan terms, can outweigh the potential expenses.